AB - AllianceBernstein: Near 8% Dividend Yield But Valuation Needs A Cooldown

2023-07-27 02:54:57 ET

Summary

• AllianceBernstein gets a hold rating today.
• Positives: a dividend yield close to 8% and beating sector average, share price over 5% below 200 day SMA, strong capital / liquidity position.
• Headwinds: valuation too high vs sector average, net income YoY showed negative growth.

Research Brief

In researching hidden dividend gems this week, one that got my attention is a financial sector stock paying close to an 8% dividend yield, the highest I found in this sector this week!

AllianceBernstein Holding L . P . ( AB ) is a well-established firm in the financial sector whose next earnings release is this week on Thursday July 27th after market close. In the run-up to that event, we will be covering this stock today and giving our take on which direction they may go.

It is known for serving institutional, high net worth, and retail investors and also have a major in-house research segment as well.

Some notable points from their company website & corporate factsheet : total market value of $10.5B, trades on the NYSE but also majority owned by Equitable Holdings ( EQH ), offices in 26 countries, assets under management of $676B at end of March.

Ratings Methodology

Our goal is to find undervalued stocks of companies with solid financial fundamentals, that pay competitive dividend yields. Our key industry focus is tech, financials, insurance, innovation.

To simplify my rating of an equity, I have broken it down into whether I would recommend or not recommend based on these individual factors:

• Valuation vs Sector Average.
• Dividend Yield vs Sector Average.
• Positive YoY Net Income Growth.
• Capital & Liquidity Strength
• Stock Price vs 200 Day SMA.

If I recommend on all 5 categories, it is a "strong buy", 4 categories is a "buy", 3 is a hold, and less than that is a sell rating. Then I compare my rating to the consensus ratings from Seeking Alpha & Wall Street.

Valuation vs Sector Average: Not Recommended

A key question to ask is how is this stock valued in terms of its price to earnings and price to book value. So, we use two key metrics to track, the GAAP-based forward P/E ratio and the forward P/B ratio, using Seeking Alpha data as a reference, and comparing the metrics of this stock to its sector average.

Its P/E as of July 26 stands at 12.53, so you are paying almost 13x earnings on this stock, which got a "C-" grade from Seeking Alpha and its P/E is almost 23% higher than its sector average, as shown below:

In terms of the P/B, we will be using the trailing twelve months ratio it is currently at 1.89, giving it a "D+" grade from Seeking Alpha and being over 72% higher than its sector average.

My targets for a stock valuation is that the P/E and P/B be at or below its sector average, and in some cases up to 5% above average. In this case, the valuations are between 20 - 80% above average, so I do not recommend this stock in terms of great valuation at this time, and am waiting for these figures to "cool down".

Dividend Yield vs Sector Average: Recommend

You heard it right.. a near 8% dividend yield. To be exact, it is 7.92% as of July 26th, with a dividend of $0.66 per share payable quarterly.

Slightly less impressive to me, however, was the 5 year dividend growth chart. Unlike many firms in the financial and insurance sector I covered recently, who had steady 5 year growth trends, this firm went from an annual dividend of $2.88 in 2018 down to $2.32 in 2019 and eventually in 2022 it was $3.54. So although there is 5 year growth, it has been lopsided:

In terms of dividend yield compared to the sector average, both the trailing twelve month and the forward yield earned an "A" grade from Seeking Alpha, both coming in well over 100% above the sector average, as the table below shows:

I think this is a strong dividend play as the evidence shows, and a dividend hidden gem in the financial sector, so today I recommend it in this category.

Later in the article, we will show you our investing idea and trade simulation, which includes the dividend income potential.

Positive YoY Net Income Growth: Not Recommended

Now, let's go into the year-over-year growth trends for net income and earnings per share, using the most recent Q1 income statement as a reference.

From a high level overview, net income in Q1 dropped to $67.4MM from a high of $85.9MM in March 2022. We also see a YoY decline in earnings per share, dropping to $0.59 in the first quarter compared to $0.87 the same quarter a year ago.

Disappointed in this 22% YoY drop in net income, I decided to dig into the actual company Q1 earnings release for comparisons, and it correlates with the Seeking Alpha data, both for net income and ((EPS)) which they refer to as "net income per unit". From the data, a YoY drop of 32% in earnings per share is concerning at the least.

Reflecting on the impact that asset values have on the firm, CEO Seth Bernstein mentioned in his Q1 commentary:

Reflecting lower year-over-year asset prices, adjusted operating income declined by 21% and adjusted earnings per unit and distributions to unitholders declined by 27%.

When looking at the top line figures, we see YoY decreases in most all revenue segments except dividends/interest and gains on investments, with a particularly large drop in "performance fees":

Based on the data, we do not recommend this stock in terms of positive net income growth at this time, however we expect a slight turnaround for Q2 results since equities markets have improved lately and probably so have the value of assets they are managing, hence the performance fees should improve.

One clue could be recent performance of index funds tracking the S&P500, such as the Schwab S&P500 index ( SWPPX ), which shows an upward trend from April until now:

This will be a positive for asset managers whose performance-based fees are tied to the value of the assets they manage.

Capital & Liquidity Strength of Company: Recommend

Here we will condense the key points as follows:

From their Q1 balance sheet, the firm had $10.39B in total assets, $5.5B in liabilities, with capital of $4.4B. It ended Q1 with $1.06B in cash & cash equivalents.

CEO Bernstein commented on clients flocking to money markets this spring, in part, which benefited the firm:

Net inflows were $0.8 billion, as investors embraced fixed income across our private wealth and retail channels. Taxable bonds, municipals and money markets drove our growth.

In my opinion, with the Fed having just raised rates again this week on July 26th, I think more clients will seek out money markets where they can get better rates on their cash, and this will continue to be a tailwind for firms like this who deal in those products.

I recommend this stock on the basis of capital & liquidity strength, which is always an important metric in evaluating the solvency of a money manager.

Stock Price vs 200 Day SMA: Recommend

As of midday trading on Wednesday July 26th, the shares were trading around $34.08:

Our investing idea, as in the last few research articles, relies on tracking the stock vs its 200-day SMA, over a 1 year timeframe, as shown in the chart above, with a trading range of 5% below / above the 200 day SMA.

This would put our trading "range" currently at $34.25 - $37.86. As the current share price today is below that, we consider it a good buying opportunity at that price which is around 5.5% below its 200 day average.

To illustrate our investing idea for readers, we use the following spreadsheet.

In the above trade simulation, we buy 100sh at $34.08, hold for 1 year to earn the full dividend yield, sell at $37.86 which is 5% above the current 200 day SMA, and earn a capital gain along with the dividend income for a total return on capital invested of 18.84%.

In case you are wondering why we always use 100 shares, it is because it allows us to also earn income from premiums on selling covered call options, which require owning a minimum of 100 shares of the underlying stock. However, covered calls are not part of the above investing idea or simulation. They could, though, add a few more points to the total return.

Based on this scenario, we recommend this stock price today in relation to its 200 day SMA, as a value buying opportunity, however we always caution that the moving averages may not always go the direction you want and could lead to this investing idea having extended unrealized (paper) losses for a while.

Ratings Score: Hold / Neutral

Today this stock won in 3 of my 5 rating categories so it is getting a hold /neutral rating. This is in line with both the Wall Street consensus and the SA quant system, as shown below, but is less bullish than the consensus from SA analysts which gave this stock a strong buy rating.

Risk to my Outlook: An Overwhelming Earnings Beat

I think a risk to my neutral outlook is that the stock will beat earnings estimates for Q2 and Q3 by a lot, thereby making my rating too cautious, and missing out on a current buying opportunity right before the stock turns bullish.

However, I think actual earnings will be either flat vs analyst estimates or slightly beating them by $0.02 - $0.05, after looking at the last 4 earnings beats or misses, as shown below:

So, I don't think a slight earnings beat will get the bulls to start running after this stock just yet, not unless the firm can also show improvement in net revenues and net income as well, which remains to be seen.

I do expect a slight improvement over Q1, though, due to higher asset market values expected, and this could be a slight tailwind for this stock, but nothing extraordinary just yet.

Analysis Wrap Up

To wrap up, the key points talked about today:

I rated this stock a neutral / hold, in line with the consensus from Wall Street and the SA quant system.

Positives: dividend yield near 8%, strong capital/liquidity, price over 5% below the 200 day SMA.

Headwinds: valuation much higher than sector average, YoY net income decrease.

A risk to my modest outlook would be this week's Q2 earnings results overwhelmingly beating estimates, causing a bull run on this stock. I think the actual results will be better than Q1 but not great enough to warrant a major bull run on this stock in the short term.

In closing, I continue to add money managers like this to my watchlist, because let's face it, they manage billions of dollars for clients and institutions, and I would consider them part of the critical financial infrastructure. They would make a great dividend play as part of a larger financial portfolio, as long as one can get them at the right share price and valuation.

Also notable, in relation to today's Fed rate hike again, the highest bank policy rate since 2007, I think it will continue to provide tailwind to fixed-income assets generating interest income, and this firm deals heavily in the fixed income space, so it will be interesting to see the impact the current hike has on its business in the next two quarters.

For further details see: