Prior to the recession of 2008 Franklin Resources Inc. (BEN) had strung together six years of exceptional growth. During the recessionary years, earnings per share first fell by 6% and then by a staggering 42%. However, as the economy and the stock market recovered, so did Franklin Resources' earnings per share, and stock prices followed its operating resurgence. The question this article attempts to answer is whether or not this high-quality investment shop with over six decades of experience is currently an attractive long-term investment, or not.
This article looks at Franklin Resources Inc, a Dividend Champion, through the lens of the graph tool. Since a picture is worth a thousand words, the reader will be provided the "essential fundamentals at a glance" expressed vividly in pictures. In order to provide you the opportunity to research this company deeper and faster we are providing a link to a live, fully functioning earnings and price correlated set of graphs found here. (Tip: Run your mouse over the various lines and watch the graphs come to life).
A Dividend Champion is defined as a company that has increased its dividend every year for 25 or more straight years. Franklin Resources Inc is a dividend champion that has raised its dividend every year for 31 consecutive years. The complete Dividend Champions list is compiled courtesy of David Fish. (Open as an excel spreadsheet and look at the tabs on the bottom to find the Dividend Champions list).
About Franklin Resources Inc: from their website
"Franklin Resources, Inc. is a global investment management organization operating as Franklin Templeton Investments. Franklin Templeton Investments provides global and domestic investment management solutions managed by its Franklin, Templeton, Mutual Series, Fiduciary Trust, Darby and Bissett investment teams. The San Mateo, CA-based company has more than 60 years of investment experience and over $725 billion in assets under management as of March 31, 2012. For more information, please visit franklinresources.com."
Franklin Resources Inc: A Dividend Champion with 31 Consecutive Years of Dividend Increases
Learning from the Past - Looking at Earnings Only
Since dividends are paid out of earnings, a clear perspective of a company's historical earnings growth record is a vital component of a dividend investor's prudent due diligence process. The following graph plots Franklin Resources Inc.'s earnings per share since 1998. A quick glance to the right of the graph shows that Franklin Resources Inc has increased earnings at a compounded rate of 11.7% (see purple circle on graph) per annum.
Earnings Determine Market Price and Dividend Income: The following earnings and price correlated graphs clearly illustrates the importance of earnings to both price movement and dividend income. The earnings growth rate line or True Worth ™ line (orange line with white triangles) is correlated with the historical stock price line. On graph after graph the lines will move in tandem. If the stock price strays away from the earnings line (over or under), inevitably it will come back to earnings.
Since dividends are paid out of earnings, and therefore represent additional return on top of what the market capitalizes earnings at, they are depicted by the light blue shaded area and stacked on top of the earnings line. Therefore, a quick visual of these two important components is simultaneously revealed:
1. The additional return that dividend paying stocks provide.
2. The percentage of earnings paid to shareholders as dividends (payout ratio).
The value in this article is through carefully analyzing the earnings and price correlated fundamentally based graphs. Notice that one glance tells you how well the company has performed on an operating basis historically and how the market valued that historical performance. Therefore, the reader is free to discover whether or not current valuations make sense based on historical norms coupled with fundamental values. Instead of opinion, this article is designed to produce facts that can be analyzed to the readers investing benefit.
Performance Table: Capital Appreciation and Dividend Income Franklin Resources Inc
The associated performance results, with the earnings and price correlated graph, validates the above discussion regarding the two components of total return: Capital appreciation and dividend income. Dividends are included in the total return calculation and are assumed paid, but not reinvested.
When presented separately like this, the additional rate of return a dividend paying stock produces for shareholders becomes undeniably evident. In addition to the 7.6% capital appreciation (Closing Annualized ROR), long-term shareholders of Franklin Resources Inc would have received an additional $27,243.83 in dividends that increased their total return from 8.3% to 7.6% per annum.
(Note: Since this is a Dividend Champion it has raised its dividend every year for at least 25 years, therefore, negative dividend growth rates shown, if any, will be attributed to special additional dividends paid in excess of the company's regularly reported dividend rate)
The following graph plots the historically normal PE ratio (the dark blue line) correlated with 10-year Treasury note interest. Notice that the current price earnings ratio on this quality company is as normal as it has been since 1998.
A further indication of valuation can be seen by examining a company's current price to sales ratio relative to its historical price to sales ratio. The current price to sales ratio for Franklin Resources Inc is 3.70, which is historically normal.
Looking to the Future
Extensive research has provided a preponderance of conclusive evidence that future long-term returns, and the dividend and its growth rate are a function of two critical determinants:
1. The rate of change (growth rate) of the company's earnings
2. The price or valuation you pay to buy those earnings
Therefore, forecasting future earnings growth, bought at sound valuations, is the key to safe, sound, and profitable performance.
Therefore, it logically follows that measuring performance without simultaneously measuring valuation is a job half done. At its current price, which is attractively aligned with its True Worth™ valuation, Franklin Resources Inc represents a potential opportunity to invest in a Dividend Champion at a reasonable price. The important factor is that Franklin Resources Inc has real assets and cash flow underpinning its stock price. This solid economic foundation offers shareholders the potential for both a strong margin of safety and an opportunity for an increasing dividend income stream and potentially attractive future returns.
The Estimated Earnings and Return Calculator Tool is a simple yet powerful resource that empowers the user to calculate and run various investing scenarios that generate precise rate of return potentialities. Thinking the investment through to its logical conclusion is an important component towards making sound and prudent commonsense investing decisions.
The consensus of 18 leading analysts reporting to Capital IQ forecast Franklin Resources Inc.'s long-term earnings growth at 11.2%. Franklin Resources Inc is currently trading at a P/E of 13.9, which is inside the value corridor (defined by the five orange lines) of a maximum P/E of 18. If the earnings materialize as forecast, Franklin Resources Inc.'s True Worth valuation would be $229.13 at the end of 2017, which would be a 12.8% annual rate of return from the current price, including assumed dividends.
Earnings Yield Estimates
Discounted Future Cash Flows: All companies derive their value from the future cash flows (earnings) they are capable of generating for their stakeholders over time. Therefore, because Earnings Determine Market Price and dividend income in the long run, we expect the future earnings of a company to justify the price we pay.
Since all investments potentially compete with all other investments, it is useful to compare investing in any prospective company to that of a comparable investment in low risk Treasury bonds. Comparing an investment in Franklin Resources Inc to an equal investment in 10-year Treasury bonds illustrates that Franklin Resources Inc.'s expected earnings would be 6.3 times that of the 10-Year T-Bond Interest. (See EYE chart below). This is the essence of the importance of proper valuation as a critical investing component.
This report presents essential "fundamentals at a glance" on Dividend Champion Franklin Resources Inc, illustrating the past and present valuation based on earnings achievements as reported. Future forecasts for earnings growth are based on the consensus of leading analysts. Although with just a quick glance you can know a lot about the company, it's imperative that the reader conduct his or her own due diligence in order to validate whether the consensus estimates seem reasonable or not. Follow the link we provided at the beginning of this article to a fully functioning graph on Franklin Resources Inc.
Summary & Conclusions
If the consensus of leading analysts is correct, then Franklin Resources with an 11% expected growth rate appears very attractive at its current valuation. However, the financial services industry is going through a lot of change with a proliferation of ETF's as one example that could represent a long-term threat to profitability. Therefore, we feel that prospective investors should conduct their own due diligence before taking a position. On other hand, valuation does look attractive at today's levels.
Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.