Dividend Analysis: Alliance Bernstein Holding

Dividends Matter reader Yishai has requested that we have a look at Alliance Bernstein Holding L.P. (AB). This company is currently paying a juicy dividend yield of 5.59%! Any company paying that kind of dividend yield is definitely worth a look. It trades on the NYSE under the symbol AB.

Company Profile:

From Yahoo Finance

AllianceBernstein Holding L.P. and its subsidiaries provide investment management and related services to institutional clients, retail clients, and private clients in the United States and internationally. It offers institutional investment services, including separately managed accounts, sub-advisory relationships, structured products, group trusts, mutual funds, and other investment vehicles to unaffiliated corporate and public employee pension funds, endowment funds, domestic and foreign institutions, and governments and affiliates.

The company’s retail services individual investors comprise retail mutual funds sponsored by AllianceBernstein, its subsidiaries, and its affiliated joint venture companies, sub-advisory relationships with mutual funds sponsored by third parties, and separately managed account programs sponsored by various financial intermediaries. It provides separately managed accounts, hedge funds, mutual funds, and other investment vehicles for private clients, including high-net-worth individuals, trusts and estates, charitable foundations, partnerships, private and family corporations, and other entities. It also offers in-depth and independent fundamental research, portfolio strategy, trading, and brokerage-related services to institutional investors.

Market capitalization is $ 7.19B.

Company Fundamentals:

Starting with the return on invested capital, I can see that this management has done an excellent job. Except for 1 sub par year in 2003 where the ROIC was 6.8%, every other year exceeded 13%. The last two years have delivered 18.1% and 20.8% respectively. The 5 year average ROIC is 15.3%.

The return on equity reflects the same numbers as there does not appear to be any debt. The 10 year average ROE is 27.18% and the 5 year average is 14.82%. The ROE has definitely declined but that is due to some pretty phenomenal numbers that were produced in 1998 and 1999 of 67.7% and 68.73% respectively.

Unfortunately, the good news seems to end there. The equity growth rate has been sub par since 2001! The 6 year average equity growth rate is 0.75%. The 3 year average rate picks up to 6.63% and last year’s rate improves to 9.33%. In fact, from 2001 to 2003, the equity growth rate was negative.

Now, the EPS growth rates don’t seem to reflect the information in the equity growth rates. The 9 year average rate is 9.76%. That increases to 15.18% over the last 5 years, and it keeps getting better over 3 years at 52.32%. Last year’s EPS growth rate was 26.49%. There was massive EPS growth rate of 140% in 2004.

Check this out. Over the 9 year period, the sales growth rates have been negative at -17%. Things have definitely improved and the 5 year average sales growth rate is 16.67%. Last year’s sales growth rate was 30.69%. Some strange happenings in the company fundamentals if you ask me.

Dividend Fundamentals:

As I said at the beginning, AB is currently paying a monster dividend yield of 5.59%. That of course blows away the dividend yield on the S&P 500 index and the DJIA. It is a better dividend yield than many of the financials we have analyzed recently.

However, the dividend growth rate over the last10 years has been quite the roller coaster ride with lows of -39% to highs of 135%. The 9 year average dividend growth rate has been 5.4%. Over 6 years, the dividend growth rate has been negative! This helter skelter system of dividend increases (and decreases) make it very hard to estimate future growth rates.

And the dividend payout ratios have been astronomical! Payout ratio currently sits at 93.19%. No wonder that they don’t have a steady dividend growth rate. Since they seem to be pretty much paying out everything that they make, they have to adjust their dividend based on how they perform each year.

Valuation Models:

Let’s try and value this stock using our 3 models.

From a dividend yield perspective, you would assume that the current 5.59% must be an all-time high. But it is not. The 5 year average high dividend yield is 6.95%, and the 10 year average high dividend yield is 8.1%! So, if we as investors demand the 5 year average high dividend yield, then our model price is $66.76. At the current price of 83.05, Mr. Market is currently demanding a hefty premium of 24.4%!

Benjamin Graham would think we were being too conservative! The Graham number works out to $41.60. That implies a premium of 99.66%.

With the terrible historical equity growth rates, it made calculating my model price from the discounted present value method very difficult. I normally use the equity growth rates to forecast the future EPS growth rate. In this case, I would use the conservative equity growth rate over the last 5 years of 2.13%. Of course, with a future EPS growth rate that is that small, you know that this stock will be astronomically overvalued. In fact, my model price worked out to $11.45 which means a premium of 625%.

Here are my AB calculations.

Here is the 1 year stock price chart:

Stock Price Chart for AB

As you can see, the stock has had an amazing run. We could have bought it for our high dividend yield model price of $66.76 back in October 2006.

Conclusion:

Although this dividend yield is tempting, I would not add this stock to a portfolio of superior dividend yielding stocks. From the lack of equity growth to the inconsistent dividend growth rates to the super high payout ratio, this company just does not exhibit the characteristics I want in a safe, trustworthy dividend payer.

What are your thoughts on this stock?

Full Disclosure: I do not own any shares in AB.

Comments

[larrypiano2001]

You should do more homework on AB. You are correct that it has almost no debt, but apparently you didn't notice that it pays no taxes. That's because it's a master limited partnership, which also explains why they distribute all their earnings - they have to. As for their one down year in 2003, that was the result of the mutual fund fracas that year, in which they got caught up. The fines and restitution they had to pay put a heavy dent in their distribution and earnings for that year. That was a one-time event, however, and if you adjust for that, the record of this company is exceptional - growing earnings and distributions every year. And if the analysts are right, their growth over the next two years should continue at double-digit rates. Next time, do your homework!

[larrypiano2001]

You should do more homework on AB. You are correct that it has almost no debt, but apparently you didn't notice that it pays no taxes. That's because it's a master limited partnership, which also explains why they distribute all their earnings - they have to. As for their one down year in 2003, that was the result of the mutual fund fracas that year, in which they got caught up. The fines and restitution they had to pay put a heavy dent in their distribution and earnings for that year. That was a one-time event, however, and if you adjust for that, the record of this company is exceptional - growing earnings and distributions every year. And if the analysts are right, their growth over the next two years should continue at double-digit rates. Next time, do your homework!

[User 120589]

The yield is so high because it is a MLP (Master Limited Partnership) and is required to distribute the majority of its cash flow. In return, the company and shareholders receive several tax benefits.