The Asset Management Industry: 3 Dividend Plays To Buy, 1 To Avoid

Includes: AB, BEN, BLK, TROW
by: Hedgefund Manager

In my previous article, I highlighted three profitable stalwarts with low debt that had the potential to grow their dividends as their operating earnings grew. In this article, I highlight three good asset managers to buy: T. Rowe Price (NASDAQ:TROW), Franklin Resources (NYSE:BEN), and BlackRock (NYSE:BLK). In addition, I discuss one asset manager to avoid: AllianceBernstein (NYSE:AB).

The Asset Management Industry

The asset management industry provides pre-packaged investment advice to retail investors, corporations, endowments, and pension funds. The asset management industry, as a whole, has attractive economics: even in this tough year for the industry, returns on equity of 10% and dividend yields of 2.6% are common across the industry. In good years, the returns on equity can rise even further, up to 30%. Revenues are derived from a management fee on all assets under the firm's management. Generally the fee is fixed- the asset manager receives the revenue whether the performance of its underlying funds outperform or underperform their respective target.

Asset managers generate considerable, steady streams of cashflow from these management fees, and dividend investors can participate in the upside. This is a services-based industry consequently, there is limited re-investment required to maintain and grow operations. These businesses generally carry low debt because they generate more than sufficient cashflow from operations.

Asset management is a good business over time: as the market rises, asset managers' revenues increase from two sources. First, revenue grows as the current assets under management grow with the market and fund performance. Second, revenue grows as additional funds flow into the asset manager through 401-ks plans, brokerage accounts, and so on. When the market falls, the reverse occurs-- investors pull funds from the asset managers and place the investments in cash. If you believe markets will rise over the long-run, asset management stocks are one of the better performing groups in financials.

Below are key financial metrics for 4 well-known asset managers:


Dividend Yield




Long-Term Growth

Alliance Bernstein


















T. Rowe Price






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Overall, these numbers confirm these are strong, profitable businesses with low debt and good growth prospects. These economics confirm that the asset management industry, as a group, is a good place to identify attractive dividend growers. Additionally, all four companies provide dividend yields greater than 2% and have reasonable valuation multiples.

As an investor, you care about total return: dividend yield and capital gains. If you invest in a stock that pays a very high dividend and a capital loss due to business weakness, your total return will not be adequate and can even be negative. So select companies whose business fundamentals are stable and improving.

I focus on companies with strong competitive positions that are growing. Over time, the total return- capital gains and dividend yield- can potentially become very attractive.

Three Dividend Growth Plays to Buy: BlackRock, Franklin-Templeton, T. Rowe Price

Let's go to the numbers: BlackRock, Franklin-Templeton, and T. Rowe Price all provide a good dividend yield of 2-3% today, with considerable growth expected in the future. All three have strong investment franchises, good fund inflows and good fund performance. These are the type of "dependables" that I seek in my core investments. Look in the long-term growth column above. Each of these companies is expected to grow its earnings by more than 10% annually over the next five years. These companies have the capacity to increase their dividends considerably as earnings grow.

One Dividend Play to Avoid: AllianceBernstein

When investing for income, many investors focus on securities paying high dividend yields. But the high yield afforded by many of these securities often prove fleeting, because the fundamental operating or financial condition of the underlying business cannot sustain the dividend levels. As business fundamentals deteriorate, the company's board often reduces the dividend payout in order to fund operations or debt payment.

AllianceBernstein's 8% dividend yield and P/E of 9 is a clear standout among these four companies. But these multiples are a dividend trap, reflecting fundamental weakness and meaningful challenges in AllianceBernstein's business.

AllianceBernstein is a global investment firm that manages $411 Billion in assets for individuals, corporations, endowments, and governments. Additionally, the firm provides research and brokerage services to institutional investor clients. AllianceBernstein derives its revenue from management fees for its fund offerings and brokerage fees for its institutional research products.

Due to investment under-performance and market moves, AllianceBernstein's assets under management declined 32% from $654 Billion to $474 Billion, as investors transferred their assets away from the investment firm. As a result, the stock price declined from $60 to $13 over the last three years. The stock price may rise if investment performance improves. But a turnaround in investment performance will take a number of years and is not assured. In the meantime, the very influential fund-rating service, Morningstar, currently ranks Bernstein's stock funds at 2 out of 5 stars, with 1-star being its worst rating and 5-stars its best rating. With weak performance, the big risk with this stock is asset retention. If assets continue to leave the firm, the stock will continue its decline. Income investors must consider the risk of capital loss in this security.

While the current dividend yield is a tempting 8%, there is considerable risk of capital loss in this stock. Income investors should consider these risks before investing in AllianceBernstein.

These stock ideas should be used to identify potential candidates for your portfolio. Remember to perform your own due diligence before purchasing or selling any security for your portfolio.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.