AB - AllianceBernstein: Hold This Stock For Solid Dividend Yield

2023-03-22 02:12:53 ET

Summary

• AllianceBernstein has recently reported its fourth-quarter results. It has reported revenue of $990.2 million, a 22% YoY decrease compared to $1264.6 million in Q4FY21.
• I believe the demand might increase in the coming time as a result of increasing financial literacy and changing client needs.
• AB can maintain its last year's dividend payment due to its expanded product offerings and distribute an annual dividend of $3.54 per share, representing an annual dividend yield of 10%.

Investment Thesis

AllianceBernstein ( AB ) is an asset management company that provides investment management and research services to its clients. The company has recently experienced a challenging quarter due to market volatility and decreased rate of consumer trading activities. However, I believe it can deliver a strong performance in the coming quarters as it has expanded its product offerings which can also help it sustain its high dividend payment.

About AB

AB is an asset management company that offers customers diversified investment management and research services globally by operating three buy-side distribution channels : Institutions, Retail, and Private Wealth Management, and a sell-side business, Bernstein Research Services. The company's institutional clients include insurance companies, foundations & endowments, central banks & governments worldwide, and EQH & its subsidiaries. It mainly offers mutual funds, separately managed accounts, sub-advisory relationships, hedge funds, collective investment trusts, and other investment vehicles. EQH and its subsidiaries are the largest institutional clients and, as of December 31, 2022, 2021, & 2020, accounted for 24%, 25%, and 29% of its institutional AUM, respectively. Institutional services represented 46%, 43%, and 46% of its AUM in December 2022, 2021, and 2020, respectively, and the fees earned for providing these services represented 16%, 13%, and 14% of its net revenues in December 2022, 2021, and 2020, respectively. It also manages investments for a wide variety of retail investors globally through retail mutual funds it sponsors, mutual fund sub-advisory relationships, separately managed accounts, and other products. Its Retail products and services are mainly distributed through financial intermediaries such as broker-dealers, banks, insurance sales representatives, registered investment advisors, and financial planners. As of December 31, 2022, 2021, and 2020, Retail services made 38%, 41%, and 39%, respectively, of its AUM, and the fees it earned from providing these services accounted for 49%, 50%, and 49% of its net revenues in December 2022, 2021, and 2020, respectively. Private wealth management consists of customers such as athletes, entertainers, corporate and private practice owners, and individuals and families with high net worth who have created generational wealth. Private wealth services accounted for 16%,16%, and 15% of its AUM as of December 31, 2022, 2021, and 2020 respectively. The company's net revenues for providing these services for 2022, 2021, and 2020 were 25%, 25%, and 24%, respectively. In its sell-side business of Bernstein Research services, the company provides institutional investors with high-quality fundamental & quantitative research and trade execution services in equities and listed options. It represented 10%, 10%, and 12% of the company's total net revenues for the year ended December 31, 2022, 2021, and 2020 respectively.

Financials

Globalization has been one of the important reasons for more wealth creation in the world and has ultimately increased the demand for asset management services. I believe this demand can flourish in the coming time due to increasing financial literacy and changing client needs. The rapidly rising demand has intensified competition in the industry and forced the participants to create a strong position in the market.

AB has recently reported its fourth-quarter results . It has reported revenue of $990.2 million, a 22% YoY decrease compared to $1264.6 million in Q4FY21. The company has managed to beat the market consensus by $112.54 million. The decline in revenue is mainly caused by a 12% decrease in the revenue of Bernstein Research Services. This segment experienced a downfall mainly due to decreased customer trading activities in Europe and Asia. The company has recorded operating expenses of $786 million, which is a 10% YoY decline compared to $872 million in Q4FY21. It reported an operating income of $204 million in Q4FY22, which is a decline of 48% compared to $393 million in Q4FY21. The decreased operating income resulted in an operating margin contraction of 1,080 basis points. AB recorded a net income of $192.7 million, a decrease of 48.6% compared to $375.1 million in Q4FY21. Decreased net income resulted in diluted EPS of $0.59, which is $0.03 more than the market expectations. AB also reported a full result. The company has reported full-year net revenue of $4.1 billion, a 9% decrease compared to $4.4 billion in FY2021. Operating expenses of FY2022 were $3.2 billion, which is flat compared to FY2021. It recorded a full-year operating income of $815 million, a decline of 33% compared to $1.2 billion in the prior year, resulting in a full-year operating margin contraction of 580 basis points. The company has reported a full-year net income of $775.5 million, a 32% decrease compared to $1.15 billion. The decreased net income resulted in a diluted net income per Unit of $2.94. In December 2022, assets under management reached $646.4 billion, up $33.7 from September 30, 2022, and down $132.2 billion from December 31, 2022.

The company experienced a challenging quarter mainly due to market volatility and declining customer trading activity rates. However, I believe it can bounce back in the current year due to its diversified global platform and expanded private offerings and investment vehicles such as active ETFs. In addition, the company's robust distribution capabilities can benefit it in capturing additional market share and increasing its profitability. All these factors can significantly contribute to its long-term growth and help it gain a strong position in the competitive market. AB is facing headwinds of rising interest rates, but I think the company's hedging program can help mitigate some parts of this headwind. According to the seeking alpha, the EPS of the FY2024 of AB might be $3.05. After considering all the above factors, I think the seeking alpha's estimates are correct.

Solid Dividend Yield

AB has been paying dividends to its shareholders for the past many years, which signals its good positioning in the market. In the previous year, the company distributed cash dividends of $1.29, $0.90, $0.71, and $0.64 in each of the four quarters, respectively. This dividend makes the total annual dividend $3.54 per share, representing a dividend yield of 10% compared to the current share price. In the current year, it has announced a dividend of $0.70 per share in the first quarter. I believe the company can maintain its last year's dividend payment due to its expanded product offerings and distribute an annual dividend of $3.54 per share, representing an annual dividend yield of 10% compared to the current share price. I think this high dividend yield makes the company an attractive investment option for risk-averse investors and retired investors with generally low-risk appetites.

Risk Factors

Intense Competition

The company competes based on a variety of criteria, such as client investment performance, the diversity of investment services, innovation, and reputation. Due to its global position, AB frequently competes against companies with more experience and solidified ties with customers, government officials, and other market participants. This could limit AB's potential to grow. Also, client flows may be negatively impacted if AB is unable to maintain and improve its investment performance, which could make it harder for the company to compete successfully. Also, more competition might cause the demand for AB's goods and services to decline, which would be detrimental to the company's financial situation, operational results, and future commercial prospects.

Banking Crisis

Recently, we have witnessed one of the biggest bank failures in history with the unanticipated crash of silicon valley bank and signature bank. If we analyze all the significant recessions, we can clearly see that the bank crisis follows all the major recessions. The reason behind the current collapse of the SIVB and SBNY was the bank run.

Currently, in the USA, the treasury yield is 4.5%, and the national saving deposit rate is 0.37% which is very low. That is why bank customers are withdrawing their money from banks to invest it in high-yielding investment opportunities. Generally, the bank keeps only a small portion of the client's deposit in hand. Hence, to return the customer's money, the banks started selling bonds, but due to rising interest rates, the banks had to sell bonds with huge losses, and the news of these huge losses increased the bank runs.

Most of the customers of the SIVB were startups. The customer deposits in the SIVB reached $124 billion from $62 billion in 12 months. The SIVB invested this money in bonds when the yield was very low. Due to rising inflation, the government decided to increase the interest rates, which led to a fall in bond prices. The startups started withdrawing their money from SIVB in the same period as the bank loans were becoming expensive day by day. That is why the SIVB decided to sell its bond with huge losses. These vast losses on bond investment and bank runs resulted in SIVB's collapse.

I think the primary driver of this collapse is rising interest rates. To survive bank crises, financial companies should make appropriate hedging strategies to counter rising interest rates. Currently, the fed rates in the USA range between 4.5% and 4.75%, which is a 15-year high. These rates might continue to increase in the coming period as the core inflation is still not under control. According to Oliver Rust, Truflation's data aggregator , "January's consumer prices data came in higher than expected at 6.4%, leading the Federal Reserve to indicate that it would hike by 50 basis points at its meeting on March 22, rather than the 25 basis points most expected."

The rising interest rates can reduce the net income and AUM of the company. The liquidity of some asset-backed and other securities may also be severely restricted by high market volatility, uncertainty, and cutbacks in the availability of margin financing, making it occasionally impossible to sell these assets for prices that reflect their actual economic value. If the market volatility sustains in the coming period, it becomes more challenging for the company's funds to fulfill redemption requests when there is a lack of liquidity. If liquidity were to deteriorate, this might have a negative impact on AB's AUM, revenues, and net income going forward. AB has framed a hedging program that helps the company to minimize the market risk. The company utilizes a variety of derivative instruments, such as futures, swaps, forwards, and options contracts to hedge the market risk. The company's hedging program only covers some of the market risks. That's why AB's investments are still exposed to remaining market risk.

Valuation

The company has recently reported its fourth-quarter results and experienced a downfall mainly driven by market volatility and a decline in customer trading activities. However, I believe it can perform well in the coming quarters due to its diversifying portfolio and new product offerings, which can help it to gain a stronger position in the market. AB is also facing headwinds of rising interest rates, but I think the company's hedging program can help mitigate some parts of this headwind. According to the seeking alpha, the EPS of the FY2024 of AB might be $3.05. After considering all the above factors, I think the seeking alpha's estimates are correct. The EPS of $3.05 gives the forward P/E ratio of 11.62x. After comparing the forward P/E ratio of 11.62x with the company's 5-year average P/E ratio of 12.16x, I think the company is slightly undervalued. I believe the company might gain significant momentum from the new product offerings and help it to trade above its 5-year average P/E ratio. I estimate the company might trade at a P/E ratio of 13.5x, giving the target price of $41.18, which is an 16.13% upside compared to the current share price of $35.46.

Conclusion

AllianceBernstein is an asset management company that provides research and investment management services. The company is exposed to the risk of market volatility and intense competition, which can negatively impact its profit margins. The company has recently reported a challenging quarter mainly due to market volatility and declined customer trading activities. However, I believe that the company can perform better in the coming quarters as a result of its diversification and expanded product offerings, which can help it to gain a competitive position in the market and sustain its high dividend payout. The company has limited upside at the current share price. That is why making a new position is not advisable for investors. However, investors can hold the stock for a solid dividend yield. After analyzing all the above factors, I assign a hold rating to AB.

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