BlackRock (NYSE:BLK) has rallied dramatically over the past 12 months, with a total return of 59%, albeit somewhat lagging the Asset Management industry (total return of 68.6%). Trailing 12-month returns can be deceiving, however, because some firms with higher-than-average returns over this period were simply those that fell further during the COVID-driven decline. BLK has substantially outperformed the Asset Management industry over the trailing 3- and 5-year periods.
Trailing 12-month price history and basic statistics for BLK (Source: Seeking Alpha)
The dividend yield is 1.76% and the 3-, 5-, and 10-year dividend growth rates are 12.0%, 12.1%, and 12.1%, respectively. This dividend growth rate looks sustainable, given the consensus earnings growth outlook of 14.2% per year for the next 3-5 years and the 42.7% payout ratio. The Gordon Growth Model suggests that expected return of about 14% is not unreasonable, given the current yield and stable dividend growth rate. The trailing 15-year total return for BLK is 13.9%, for reference, although the 5- and 10-year annualized returns are considerably higher (24% and 21.3%, respectively).
BLK reported Q3 results on October 13th, beating the consensus expected EPS by 17%. The company has beaten the analyst consensus for EPS in each of the past 9 quarters.
Trailing and estimated future quarterly EPS for BLK. Green (red) values indicate amount by which the reported EPS exceeded (missed) the consensus expected level (Source: E-Trade)
I last wrote about BLK on March 17th, about 7 ½ months ago. At that time, I assigned a bullish rating, based on the company’s dominant market positions in asset management and strong outlooks. Since that post, BLK has returned a total of 31.2%, as compared to 17.4% for SPY over the same period.
Performance of BLK and the S&P 500 since my post on March 17, 2021 (Source: Seeking Alpha)
In analyzing BLK, I relied on two forms of consensus outlooks. The first is the well-known Wall Street analyst consensus. The second is the market-implied outlook, a probabilistic forecast of price return that represents the consensus of buyers and sellers of options on BLK. The price of an option on a stock represents the market’s consensus estimate of the probability that the stock price will rise above (call option) or fall below (put option) a specific level (the strike price) between now and when the option expires. By analyzing the prices of put and call options at a range of strike prices, all with the same expiration date, it is possible to calculate the probability distribution of price returns that most closely reconciles the options prices. This is the market-implied outlook.
In mid-March, the Wall Street analyst consensus outlook was bullish, with expected 12-month total return of 17.1%. The market-implied outlook for BLK was neutral to mid-2021, shifting to slightly bearish by the early 2022, with expected volatility of 28%. Considering the fundamentals, along with the Wall Street consensus and the market-implied outlook, I assigned a bullish rating.
With BLK’s large gains since my last analysis, along with the strong earnings in the intervening 3 quarters, I have updated the market-implied outlook and compared this with the current Wall Street consensus.
E-Trade’s calculation of the Wall Street consensus uses ratings and price targets for 8 ranked analysts who have published their views within the past 90 days. The consensus rating is bullish, but the consensus 12-month price target is only 2.5% above the current price. Back in March, the consensus rating was bullish as well, but the 12-month price target was about 15% above the share price at that time. In the intervening months, the share price has risen faster than the consensus price target, leaving the shares with little expected upside.
Wall Street analyst consensus rating and 12-month price target for BLK (Source: E-Trade)
Seeking Alpha’s version of the Wall Street consensus combines the views of 13 analysts who have updated their ratings and price targets on BLK over the past 90 days. The consensus rating is bullish and the consensus price target is 2.2% above the current share price.
Wall Street analyst consensus rating and price target for BLK (Source: Seeking Alpha)
The two sources for the Wall Street consensus agree, with bullish ratings and expected 12-month price appreciation of about 2.3%. The substantial price gains earlier in 2021 have caught up with price targets.
I have analyzed the prices of call and put options with varying strike prices, all expiring on January 21, 2022, to generate the market-implied outlook for BLK for the 2.6-month period from now until that expiration date. I have also calculated the 7.4-month market-implied outlook using options that expire on June 17, 2022. The options trading is thin for this later expiration date, so the results are considered less meaningful than for the shorter-term outlook.
The standard presentation of the market-implied outlook is a probability distribution of price return, with probability on the vertical axis and return on the horizontal.
Market-implied price return probabilities for BLK for the 2.6-month period from now until January 21, 2022 (Source: Author’s calculations using options quotes from E-Trade)
The market-implied outlook for BLK for the next 2.6 months is generally symmetric, although the peak probabilities are tilted towards positive returns (a bullish indicator). The maximum probability corresponds to a price return of 2.6% for this period. The annualized volatility derived from this outlook is 25.9%.
To make it easier to directly compare the probabilities of positive and negative returns, I rotate the negative return side of the distribution about the vertical axis (see chart below).
Market-implied price return probabilities for BLK for the 2.6-month period from now until January 21, 2022. The negative return side of the distribution has been rotated about the vertical axis (Source: Author’s calculations using options quotes from E-Trade)
This view shows that the probabilities of positive returns are consistently and materially higher than for positive returns of the same magnitude for a range of the most-probable outcomes (the solid blue line is well above the dashed red line for the returns on the left side of the chart). This is a bullish market-implied outlook from now until January 21, 2022.
The market-implied outlook for the 7.4-month period from now until June 17, 2022, is of questionable value because the trading in the June options is thin. I look at this outlook just to see if anything looks inconsistent with the nearer-term view. For this time horizon, the probabilities of positive and negative return are much closer to one another than for the shorter outlook, although the probabilities of positive returns tend to be slightly higher for the higher-probability outcomes. This is a moderately bullish view. The annualized volatility calculated from this distribution is 25.7%.
Market-implied price return probabilities for BLK for the 7.4-month period from now until June 17, 2022. The negative return side of the distribution has been rotated about the vertical axis (Source: Author’s calculations using options quotes from E-Trade)
To summarize the market-implied outlooks, the view to January 21, 2022, is bullish and the degree of bullishness gets smaller as the outlook shifts to the middle of 2022. The expected volatility is about 26%.
BlackRock is a well-run firm in a dominant market position in asset management. The company demonstrated the ability to consistently grow earnings and the dividends. With the high returns over the past year, the share price has risen to the point that the Wall Street consensus is that there is very little expected price appreciation for the next year. The Wall Street consensus rating continues to be bullish, but the 12-month expected total return is 4.1%. Given the company’s dividend growth track record and current yield, however, an expected return of 14% (from the Gordon Growth Model) is not unreasonable. The market-implied outlook for BLK is bullish, especially for the next several months, and the expected volatility is quite tame. As a rule of thumb for a buy, I want to see an expected 12-month return that is at least ½ the expected (annualized) volatility. The Wall Street consensus price target falls far short of this threshold, but the Gordon Growth Model can motivate a buy. I am maintaining my bullish rating on BLK.
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Disclosure: I/we have a beneficial long position in the shares of BLK either through stock ownership, options, or other derivatives. 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.