This is Good Investment Advice!
Chuck is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The timeless investment strategy advocated by the world’s greatest investors is value investing followed by a buy-and-hold approach. In today’s world of instant gratification, many foolishly eschew the buy-and-hold approach. I believe that is a mistake, especially if you buy the right investment at the right price or value. I believe that BlackRock (NYSE: BLK), the world’s largest asset manager, meets all the requirements of a good investment in spades.
On July 18, BlackRock reported earnings that were down quarter over quarter, but handily beat analysts’ expectations. On the other hand, even though fiscal year 2012 is expected to be weaker than average, estimates for fiscal 2013 and beyond are expected to be very strong. Consequently, I believe the current weakness in BlackRock represents a significant opportunity for the prudent long-term, buy-and-hold investor who desires above-average growth, above-average dividend income and a margin of safety.
BlackRock is truly a global firm that offers investment advice in over 100 countries throughout the world and has captured over $3.5 trillion of assets under management. Although most of its business comes from the institutional marketplace, the retail channel represents a large long-term opportunity. Furthermore, relative to its peers, BlackRock has handily outperformed its main competitors such as Franklin Resources (NYSE: BEN), Affiliated Managers Group (NYSE: AMG), GAMCO Investors, Inc. (NYSE: GBL), or Federated Investors (NYSE: FII).
The following table illustrates that BlackRock has grown earnings significantly faster than any of its competitors, has generated higher shareholder returns (annualized performance), and offers the highest dividend yield and one of the lowest valuations within the group. As another measure of its low valuation, BlackRock’s current price to sales of 3.3 is approximately half of its historical norm.
Also, the consensus of 15 leading analysts reporting to Zacks expects BlackRock to continue growing earnings at 13.9% per annum over the next five years. Including dividends, this implies a compounded annualized rate of return of just under 19%, assuming they meet forecasts and trade at a fair value PE of 15 by year-end 2017.
BlackRock - A Picture of High Earnings Growth and Low Valuation
Through the last two recessions of 2001 and 2008, BlackRock has grown earnings over 21% per annum. Although they suffered a small earnings hiccup in 2008, less than two years later their earnings were reaching all-time highs again. Although the firm continues to be profitable in 2011, softer than normal growth has caused their stock to fall from over $200 per share to its current approximate $165.00 price indicating a bargain valuation.
Even at the current low valuation, BlackRock has dramatically outperformed the S&P 500. Furthermore, they have raised their dividend every year and at an exceptionally high rate thanks to strong earnings growth and an expanding payout ratio (see highlights on FAST Graphs table below).
Summary & Conclusions
BlackRock is in the business of giving investment advice, and they obviously do a good job at it or they wouldn’t be the biggest management firm in the world. But perhaps the best advice that BlackRock could give investors is to invest in their own common stock. After all, BlackRock has historically returned the bulk of its free cash flow to shareholders through stock repurchases and dividends. Furthermore, they clearly believe in their own stock as they recently took on additional debt to buy back 6.4 million shares of their stock from Barclays.
Finally, I believe that BlackRock has the widest moat in the financial industry. They have a conservative financial structure, generate very strong cash flows, offer an above-average and growing dividend yield, and can be bought today at one of the lowest valuations in its history. Therefore, I believe it would be foolish not to take a hard look at this high-quality dividend growth stock currently on sale.
ChuckCarnevale has no positions at the time of writing.
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.
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