The Ideal Stock for Value Investors
Justin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
What is an investor to do? Should they buy cheap stocks, those with momentum, dividend plays, or contrarian names? Well there is one stock that seems to fit all these criteria at the same time! It is also a mid-cap, which gives it even more appeal. It isn’t in my favorite industry, but that is what makes it a contrarian name. Investors may want to give Eaton Vance (NYSE: EV) a good look given its plethora of stock attributes that are generally precursors to outperformance.
Eaton Vance is an equity-focused investment management company that was founded in 1924. They have $185 billion in assets under management with 80% catered to individuals and 20% to institutions. They have a relatively diversified asset mix with equities at 56%, debt at 38%, and alternative at 6%. The company has a market capitalization of $3 billion.
The company is trading at attractive valuations compared to previous levels over the past decade. The price-to-earnings ratio is at 14x, down from normal levels above 20x. Over the last decade, this ratio has only been significantly cheaper during the recent recession. It was fractionally cheaper in 2002 and for part of 2011. The EV/EBITDA ratio, currently at 7x, tells a similar story.
The valuation picture is more mixed when looking at other asset managers. Franklin Resources (NYSE: BEN) trades two clicks lower on a P/E basis and at a similar EV/EBITDA. T. Rowe Price Group (NASDAQ: TROW) has the richest valuation in the group at 19x earnings and 11x EV/EBITDA. BlackRock (NYSE: BLK) stands at 14x earnings and 9x EV/EBITDA. There is quite a range among peers and a lot has to do with which asset class the company focuses on and current asset flow trends.
The stock was down 20% in 2011, but has shown some strong momentum of late. The stock has gained 20% since its November low and in doing so has crossed above the 50-day moving average and currently sits right at the 200-day moving average. A break of this key technical indicator could lead to significant upside. It makes for an ideal stock among investors that favor waiting on a breakout before buying a beaten-up name.
A Great Dividend Story
Eaton Vance is an ideal dividend stock. The stock’s current yield in 2.89%, better than the average stock in the S&P 1500, but it also possesses two other key dividend attributes previously highlighted here. The company has a 5-year dividend growth rate of 18% and a payout ratio under 50%. There is plenty of opportunity for the company to continue hiking dividends, which should be a tailwind to outperformance in the coming years.
Most of the industry is attractive from a dividend standpoint. The peers mentioned above all look like ideal dividend names. BEN has a dividend yield of 1%, but a five-year growth rate of 42%. TROW has a 2% dividend yield and 16% growth rate. BLK has the highest yield at 2.9% and a growth rate of 26%. All have very modest payout ratios. Given the ramifications of the Global Financial Crisis on asset prices, it is impressive to see this industry maintain such a solid dividend track record.
Eaton Vance stands out compared to the other asset managers a little bit on valuation, but mostly because it is hated according to the sell-side. It has an average analyst ranking below neutral with more sells than buys. There are 3 buys on the stock, 8 holds, and 4 sells. Compare that to BEN and its 10:1 buy to sell ranking, TROW at 9:0, and BLK at 15:1. The reason you see this is because fund flows have been weak for Eaton Vance. Not only that, but they have a big presence in large cap value and have significantly underperformed over the last three years. That is usually a precursor to a decline in assets under management. Approximately 20% of their AUM are rated 4 or 5 stars by Morningstar, way below the industry average of 32%. T. Rowe Price is the leader at nearly 60%.
Eaton Vance passes many key screens: valuation is cheap, it is a great dividend stock, it is unloved by Wall Street, and it is showing strong relative strength. It is easy to find a reason to be skeptical, but that is what makes this stock such a compelling story. Eaton Vance just may be the perfect value stock.
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