BLK - BlackRock Q4: GIP Looks Interesting But The Stock Is A Hold

2024-01-12 09:00:01 ET

Summary

• BlackRock reports Q4 results, beating EPS estimates by 82 cents and increasing dividend by 2%.
• Quarterly net inflow rises to $96 billion in Q4, bringing the total for FY 2023 to $289 billion.
• GIP acquisition is interesting and adds a nice balance to BlackRock's portfolio.

BlackRock, Inc. ( BLK ), the investment management giant, has just released its Q4 results as Seeking Alpha has covered here . The stock is flat pre-market, as the market is not only digesting the report but also the company's plan to buy Global Infrastructure Partners ((GIP)) for $3 billion in cash and 12 million shares. In addition, the company also raised its dividend by 2%. That's a lot of details to dissect along with an earnings report, so let's jump right into the latest edition of The Good, The Bad, and The Ugly.

The Good

• The EPS beat by 82 cents marks the 6th consecutive quarter that BlackRock has beaten ESP estimates. A 10% beat on EPS with revenue coming in flat suggests BlackRock operated with more discipline than the analysts expected in Q4, despite some issues I raise in the section below.
• I am usually skeptical of acquisitions and generally see it as a sign that the acquirer cannot grow organically anymore. However, I am liking the BlackRock-GIP association because, while BlackRock is a behemoth in cash, equity, fixed-income, and other "soft" assets, GIP is a leader in "hard" or " infrastructure " assets. The combined entity will be $150 billion large and will be having a well-rounded portfolio of both hard and soft assets. Click here to view GIP's portfolio.
• Quarterly net inflow moved up to $96 billion in Q4, bringing the total for FY 2023 to $289 billion. This follows the slightly scary $3 billion inflow in Q3 , leading the CEO to suggest " As we've seen before, when investors were ready to put money back to work, they did it with BlackRock. "
• Total Assets Under Management ((AUM)) went up 16% YoY in FY 2023 compared to FY 2022, clearly buoyed by the overall market sentiments.

• Finally, being the dividend fan that I am, I welcome even the 2% dividend increase from BlackRock. This marks the 15th consecutive increase, and while the yield is low around 2.50%, the forward payout ratio stands at 55%, indicating room for future increases. No wonder, Seeking Alpha's dividend grades are looking great for BLK, except the slightly low yield. I prefer a slow and steadily increasing yield on cost than one that starts at dizzying heights and comes crashing down in no time. BlackRock also returned $4.5 billion to shareholders in FY 2023 in the form of repurchases (but, see below for a catch).

The Bad and The Ugly

• Anytime you see "restructuring charges," take it as an implicit admission from the company that they either over-staffed, over-paid, or misaligned their teams and strategy. As big as Blackrock is, $61 million in restructuring charges is not something the company would like to reincur. To get specific, these restructuring charges were towards accelerated vesting of deferred compensation awards.
• The restructuring charges likely have contributed to the 2% reduction in FY 2023's operating income. In addition, in a slight sign of overindulgence, employee compensation and benefits went up by 5% or $73 million YoY in Q4.
• Despite the company highlighting that it spent nearly $5 billion toward repurchases, total shares outstanding remains close to 150 million ( page 10 ), almost exactly where it started in 2023. This clearly suggests the buybacks are merely offsetting (at best) the company's stock-based compensation, or SBC (AKA, dilution). At the end of the day, we are talking about a financial firm here and investors need to watch their numbers much closer as these firms know the name of the game.

Conclusion

As cliche as it may sound, Q4 was business as usual for BlackRock. The GIP announcement does add spice to 2024 and beyond, but 2023 finished in generally expected lines, with inflows getting stronger due to investor confidence in the market at large. Being one of the biggest names, BlackRock was bound to see the benefits.

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