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Waddell & Reed: Hidden Value On The Balance Sheet

AB Capital profile picture
AB Capital


  • Waddell & Reed is a cash-generative asset on offer at bargain prices.
  • Historical buybacks mask the underlying book value - on an adjusted basis, the stock is on offer at ~0.6x tangible book.
  • Though I think the ~27% trailing yield normalizes to ~7% going forward, the stock is still a compelling bargain.

In a low-rate environment, one would think Graham & Dodd-type value would be hard to find. Not so, in my view - Waddell & Reed's (NYSE:WDR) stock offers compelling value in a market all too willing to pay for growth.

At current levels, I think the market is overlooking the underlying value of the company's cash-rich balance sheet, masked by ~$766m of treasury shares. On an adjusted basis, WDR is on offer at a hefty ~40% discount to adjusted tangible book, despite still being a free cash flow-generative asset. Further, at the current dividend + repurchase run-rate, the total shareholder yield is running at ~27% on a trailing basis, making this a compelling buy, in my view.

Core Business in Secular Decline, But Buybacks Are Accelerating

WDR's total revenues of $264m (an anemic 1.7% YoY growth) for the quarter (Investment Management Fees of $105m, Underwriting and Distribution Fees of $137m, and Shareholder Service Fees of $22m) aptly characterizes where the business is in its life cycle. With the core business in secular decline, the focus is largely on operating expenses, which at $224m, drove an operating income of $39.4m for the quarter (+10.9% YoY).

Source: Form 10-Q

With a ~$0.12 headwind from negative marks on the seed portfolio, 1Q adjusted EPS landed at $0.32, which was well above consensus estimates of $0.29. WDR is holding firm on the dividend for now, with $0.25 declared for the quarter, though the increased buyback ($53.9m vs. $37.5m in 4Q19) was a positive surprise. For context, this would imply a trailing shareholder return run-rate of ~$241m (~27% relative to the $877m market cap at the time of writing).

Source: Company Filings

Signs of Resilience in 2Q

The updated guide offered little signs of a sustainable turnaround in the core business, but lower expenses should help

This article was written by

AB Capital profile picture
Semi-retired investor and former buy side professional. Keeping an eye on special situations and event-driven opportunities across the equity and credit universe. All views are my own.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Comments (1)

Hi Aaron, great article. I am considering buying wdr. Any input on how regulation best interest will
Impact their free cash flows?
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