- BlackRock is a giant in the financial world with management that cares more about long-term success than quick but uncertain profits.
- Shares of the company are not a bargain, but they are not as overvalued as many other quality stocks.
- We even see some great upside potential based on DCF and fundamental multiples.
BlackRock (NYSE:BLK) is an excellent company with management that cares more about long-term success than quick but uncertain profits. The capital inflow into ETFs and general boom in the stock market have pushed BlackRock's shares higher. Currently, the stock is not a bargain, but it is not as overvalued as many other quality stocks. Looking forward, we even see some significant upside potential based on DCF and fundamental multiples.
BlackRock is a giant
BlackRock is a giant in the financial world. With nearly $9 trillion in assets under management, it surpasses Vanguard, the second-largest asset management company, by almost $2 trillion. Yet, the company has a relatively conservative goal of long-term wealth creation. BlackRock breaks down the different asset categories by client, product, region, and investment style. Below is an overview of these categories, subdivided by the number of assets and the so-called base fees. Base fees are all revenues generated by BlackRock through investment advice, management fees, and securities lending.
Source: 1Q 2021 presentation
The traditional business
The individual categories grew decently last full fiscal year and in the first quarter of 2021. In 2020, the retail business (excluding iShares) was responsible for 11 percent of assets under management, while institutional clients contributed almost 40 percent of assets under management and 9 percent of base fees in 2020. The heart of the business is the iShares ETFs. BlackRock lists iShares ETFs as a separate client category because it is often impossible to track who invests in the freely tradable ETFs. Thanks to ETFs, BlackRock is the world's leading ETF provider. Assets under management for the iShares division amount to $2.7 trillion. In 2020, iShares ETFs represented 33 percent of assets under management and generated almost 40 percent of base fees.
The most significant product type is BlackRock's equity investments business. BlackRock is a substantial shareholder in thousands of companies and, with its investments, has created a global network of company holdings. Corporate holdings represented 55 percent of all assets under management last year and contributed to 50 percent of base fees. BlackRock sees itself as a fiduciary for individual investors and exerts a corresponding influence on corporate decisions at general/shareholder meetings.
Aladdin and other platforms
Other business areas include services relating to risk management, asset management, and distribution in exchange for payment of a fee. The Aladdin technology platform plays a vital role in this context. Initially developed for the company's investment and risk management, BlackRock now licenses the tool to institutional investors and adds more and more functions to it. For example, Aladdin can incorporate climate change and its impact on the economy into asset valuations. Other tools include eFront (management system for alternative investments) and Cachematrix (cash management system for banks and their corporate clients). Revenue from these tools and services was $1.1 billion in 2020, up 17 percent from the previous year, with Aladdin accounting for the largest revenue share.
Thanks to the stock market boom and the demand for its products in recent decades, BlackRock's sales have risen from under $500 million in 2000 to almost $17 billion in the last twenty years. The company only suffered a significant decline in business in the wake of the financial crisis. Here, revenues fell from $5.3 billion in 2007 to $4.5 billion in 2008, a drop of 15 percent. Given the far-reaching shockwaves that the Lehman bankruptcy sent through the financial world, this was still very moderate at BlackRock. With the first quarter of 2021, BlackRock has already started the new year at full steam. Assets held grew by almost 40 percent compared to Q1 2020. For BlackRock, this was the fourth quarter in a row with net deposits exceeding $100 billion. Accordingly, revenues are also up by a whopping 19 percent.
Analysts expect the successful development to continue and revenues to rise to $22.1 billion by 2023, increasing more than 30 percent.
Revenue development, source: www.dividendstocks.cash
As with revenue development, BlackRock shines with consistent profit and cash flow growth. The largely straight-line profit growth is particularly impressive. Since 2004, there have been only two years of earnings declines, in 2008 and 2015. Overall, earnings per share have risen from $5.91 in 2008 to $31.85 most recently. Analysts expect this to rise to $47.13 by 2023. The free cash flow is in no way inferior to this. Here, analysts also expect an enormous increase from currently 23.07 USD to 55.66 USD in 2023.
BlackRock's earnings and cash flows, source: www.dividendstocks.cash
Juicy dividend on top of good growth prospects
An attractive dividend distribution accompanies excellent operating performance. BlackRock has increased its quarterly paid dividend steadily every year for the past 11 years. Following the most recent increase of nearly 14 percent in January, from $3.63 to $4.13, shareholders will receive $16.52 per share for the year, resulting in a dividend yield of slightly below 2 percent at the current price of around $820. According to BlackRock's dividend profile, the average increase in its dividend has been a respectable 11 percent over the past ten years. Analysts expect further increases in the low double-digit percentage range. Looking at the payout ratio, which is not too high, and the projected growth, I think such increases are realistic. After all, the payout ratio is currently only 43.5 percent of profit and 50 percent of free cash flow, exactly within management's target range. Historically, the dividend yield has tended to be at the lower end of the various long-term corridors of recent years, though. But with an initial yield of 2 percent and the prospect of solid increases, BlackRock should remain attractive to dividend hunters.
Dividend history, source: www.dividendstocks.cash
BlackRock and its ambivalent relationship with Bitcoin
BlackRock's announcement included the cryptocurrency Bitcoin (BTC-USD) in two fund portfolios at the beginning of the year caused excitement among many investors. CEO Larry Fink had been somewhat pessimistic about Bitcoin, or cryptocurrencies, as an asset class in their own right. However, BlackRock is allowing two of its funds to invest in futures contracts on Bitcoin, allowing these funds to bet, for example, that the price of a bitcoin will fall or rise. However, I doubt that this now comes close to a change of mind on Larry Fink's part. Anyone who followed the transcript of the quarterly figures closely will not have missed the more or less hidden doubts in Fink's words:
Much of the dialogue today related to -- whether it's a game stop or what's goes out and with Reddit, it is about the TikTok and the day trading. And then, the activities around Bitcoin and other crypto, we're fascinated about it. We're excited about it as more people are enjoying looking at it, but the most of it is about trading and ins and outs of the marketplace.
And so, in our dialogues with our clients worldwide, it is not a major question that is being asked. It is not a major conversation related to how does that fit into their portfolio. Summit does. Does it fit into their portfolio as a long-term investor? And I would just say overall, the actions around products that are around trading and the navigation of markets and new asset classes, it is not about -- it's just not about the whole foundation of our platform about long-term investing. And so, if somebody really wanted to build a big, deep dialogue related to this, they're probably going to go to another source. And that is just not a large foundation of the conversations we're having now.
Accordingly, I do not believe that BlackRock will invest massively in Bitcoin and other cryptocurrencies in the medium term. The slight swing could nevertheless strengthen the confidence of market participants in cryptocurrencies and, here, in particular, Bitcoin.
Assessing the further upside potential
In the medium to long term, I see further upside potential for BlackRock. As you can see in the long-term logarithmic chart, the share price has developed along with its fair valuation in the past. The average adjusted P/E ratio was around 20. With the current adjusted P/E ratio of just over 23, the stock is correspondingly slightly overvalued. However, here we have to take into account the expected earnings growth. So you can see below that the stock price is just a few years ahead of BlackRock's operating earnings. If we look at the year 2023 and the profits expected there, we see an upside potential of 18.3 percent (including dividends), which corresponds to an average annual return of 6.4 percent.
Fair value calculation for BlackRock, source: www.dividendstocks.cash
We also see an upside potential by discounting BlackRock's future cash flow. For calculating the DCF, I assume that BlackRock will increase revenues by 10 percent per year (plus or minus 1 or 2 percent) over the next few years. Although the operating margin fluctuates, it should average around 40 percent over the next few years.
Operating margin and net margin, source: www.dividendstocks.cash
So, overall, we have the following data for our DCF calculation
DCF Model, source: www.alphaspread.com/estimates by author
Based on my estimates, we see a fair intrinsic value of the BlackRock share at a share price of $866.5. Compared to the current share price, we see an upside potential of almost 6 percent. Even though the upside potential here is somewhat lower than when looking at the fundamental multiples, the overall result is consistent. The BlackRock share still has further upside potential.
Source: alphaspread.com/estimates by author
Taking risks into account
BlackRock's business model is well-diversified but not free of risk. The fees mentioned above with which the company generates its revenues depend on the assets under management. However, these fluctuate with the prices of the underlying assets, such as the share price. Similarly, investors may pull money out of certain asset classes. If the popularity of ETFs declines, such a development could hit BlackRock hard.
Additionally, political actions, such as trade disputes or tariffs, are threats that shareholders should keep on their radar. These can lead to general uncertainty in the markets and significant capital outflows. In addition, BlackRock cannot escape competition despite its size. Particularly in the ETF area, the competitive and price pressure is very high. Providers are outbidding each other in this field with regular fee reductions. In the event of success, BlackRock can gain market share, but profit margins suffer from such measures.
The BlackRock share is currently no bargain and appears overvalued. However, taking into account future earnings and cash flows, the dividend offers further upside potential. In addition, the company pays a juicy dividend, and expectations of further dividend increases are justified. Those who expect the stock market boom to continue will find BlackRock an anchor company for their portfolio.
This article was written by
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