CA - Fiera Capital: This Asset Manager Is Yielding 9.3%

Summary

• This attractive 9.3% dividend yield remains covered with a payout ratio of approximately 60%.
• In addition to the dividend, the company is returning capital to shareholders through a sizeable share repurchase program.
• Fiera has recently reappointed its founder as its new CEO to steer the company back to growth.

Author's Note: All funds in Canadian currency unless otherwise noted.

Investment Thesis

Fiera Capital Corporation (FSZ:CA) (FRRPF) is a company at a cross roads. Since its founding in 2002, this asset manager grew quickly and amassed a significant portfolio of fee-bearing assets under management. During this period, the company rewarded shareholders with significant dividend growth. Since 2019 however, market performance and a failure to attract net new capital has led to a decline in assets under management or "AUM" and a deceleration in revenue growth.

As part of a turnaround strategy, the company has reinstated its founder as CEO to stimulate inflows of capital and resume AUM growth. Fiera is currently yielding over 9.3% and has launched a significant share-repurchase program. This attractive dividend is supported by a business model that produces high EBITDA margins. While dividend growth was paused in 2022, the current yield is covered with a payout ratio of approximately 60%. If Fiera can execute on its strategy and resume AUM growth, investors will be paid nicely while they wait.

Company Profile

The Canadian financial sector punches above its weight internationally. Banks including Toronto Dominion ( TD ), Royal Bank ( RY ); asset managers like Brookfield Asset Management ( BAM ) and insurers including Manulife ( MFC ) are among the largest in the world. It is easy to overlook Fiera and other smaller firms in the financial services industry. It can be helpful to look past the biggest firms to see other potential rising stars in this industry. Think National Bank of Canada ( NA:CA )( NTIOF ) in the banking sector, Intact Financial ( IFC:CA )( IFCZF ) in the insurance space and Fairfax Financial Holdings ( FRFHF ) in asset management and, perhaps, Fiera Capital Corporation.

Formerly known as Fiera Sceptre Inc., Fiera Capital Corporation is the third-largest wealth management firm in Canada. Headquartered in Montréal, Canada, Fiera has a growing global presence with offices in Toronto, Calgary, Vancouver, Frankfurt, London, Singapore and Hong Kong. Approximately 62% of Fiera's revenue is derived in Canada, with a further 23% originating in the U.S. and 16% in Europe and Asia.

As an independent global asset manager, Fiera provides investment advisory and related services to institutional investors, mutual funds, charities as well as private wealth clients. The company's core asset management business is focused primarily on equities and fixed income, however, the company is diversifying into alternative and private asset management. Fiera's strategy since inception has been to grow assets and drive margin expansion by achieving scale. Fiera also has opportunities to capitalize on the institutional demand for boutique asset management services that integrate ESG considerations and fossil-fuel free ethical filter investments.

Fiera has a market capitalisation of approximately $940M. The company trades on the Toronto Stock Exchange under the ticker "FSZ" with daily average volume of approximately 200,000 shares.

New-ish Leadership

On January 23, 2023, the company announced it has re-appointed its founder and Executive Chairman Jean-Guy Desjardins as CEO effective immediately. Desjardins who is succeeding Jean-Philippe Lemay previously held the CEO position with Fiera from September 1, 2010, to December 31, 2021. For a small company like Fiera, leadership is very impactful. A CEO with the right vision and understanding of the environment can make the difference between a return to growth or stagnation. Fiera management has strong alignment with shareholders, with insiders holding a controlling interest in the firm with an ownership position of approximately 16%.

Assets Under Management

Inflows in the most recent quarter were disappointing, leaving AUM essentially unchanged. On January 30, 2023, Fiera reported a preliminary estimate of assets under management of approximately $158.5B as at December 31, 2022 compared to $188.3B as at December 31, 2021. The firm experienced a net decline in AUM of 15.8% year over year, or almost $30B. This decline is not necessarily unique to Fiera. For example, asset management giant, BlackRock, Inc ( BLK ) saw AUM drop 16% year-on-year to $7.96 trillion in the third quarter. AUM matters as a key performance measure as it is the key driver of revenue. At $150M in Q2 2022, base management fees derived from AUM accounted for 92% of total revenue.

Source: Fiera Capital

The pace of outflows appears to be moderating, however, as market conditions improve. Over the past twelve months, the 14.5% growth in private markets investments was positive, but not enough to offset an 18.6% erosion in public market AUM. The growth in private markets relative to public markets is an indicator that Fiera has been able to solicit its private market service as an attractive alternative to public equity and fixed income markets. Organic private market AUM grew 7% in the quarter and 22% year-on-year. This is a promising trend as few margins are higher for Fiera's private market segment, than its public markets business.

Dividend Yield and Safety

Fiera pays a quarterly dividend of $0.215 for an annual payout of $0.86. The current dividend yield of 9.3% is well ahead of the company's 5-year average yield of 7.9%. From 2012 to 2021, Fiera embarked on a period of sizable annual dividend increases, fuelled by steady fee growth. Over this period, the 10-year CAGR is 10.4%. With the last dividend increase in Dec 2021, the cadence of increases along with the magnitude has slowed. The 5-year dividend CAGR is 4.20%, reflecting a slow-down in the growth of the underlying asset management business.

As of Q3 2022, last 12 months adjusted EPS was $1.53, working out to a dividend payout ratio of approximately 60% on the $0.86 annualized dividend. On a free cash flow basis, Fiera's coverage is a little tighter, with $88.2M in dividends paid out on $92.5M in free cash flow. Even during the pandemic, there was only one quarter in 2020, where free cash flow didn't cover the dividend.

On the Q2 2022 earnings call , Lucas Pontillo, Executive Vice President & Global Chief Financial Officer, responded to two separate analyst questions about the company's dividend. The CFO responded that he is comfortable that the company's cash flow covers the dividend:

We remain comfortable going forward that we will effectively have free cash flow to cover the dividend. So that's not a concern for us at this stage. And as I've mentioned, even throughout the pandemic, we're constantly stress testing our balance sheet and cash flow for everything that's happening, not only in equity markets but as well as sensitivity to interest rates. So we're quite comfortable going forward with this.

…

I think if you go back historically, you'll see that, again, the free cash flow amounts that we would have covered the dividend that we've had. And that's always the approach that we take in terms of sustainability of the dividend and not sort of the yield on the current share price.

If analysts from CIBC and RBC Capital Markets are inquiring about the company's confidence in its dividend and its dividend policy, investors should take note. While the dividend is sustainable with current cash flow coverage, the company could still choose to cut it, if it feels that the share price is not getting value for the dividend.

Returning capital

Fiera has renewed its Normal Course Issuer Bid allowing for the purchase and cancellation of up to 4,000,000 Class A Shares over the twelve-month period ending August 15, 2023. This equates to 3.9% of the company's approximately 103M outstanding class A and class B shares. Fiera's substantial dividend and share repurchase plans are indicative of the company strong cash flow and attractive margins. For the full year 2022, Fiera's average dividend yield was 9.9%. Adding this with the 2022 buyback yield of 5.3% indicates a total return of capital yield to shareholders of 15.2%.

Risk Analysis

Fiera has been working to deleverage its balance sheet since the pandemic. Its leverage ratio has returned to pre-pandemic levels at 3.27X, a significant improvement from its peak of 3.93X in March 2020. Over this period, net debt and funded debt levels have also normalized to 2019 levels.

Fiera's key risk is a failure to execute on its growth plan. With AUM being the key driver of fee revenue, Fiera's success hinges on reinvigorating capital inflows. The company has suffered net redemptions in eight of the last 10 quarter, causing a decline in AUM. Trading at 19X earnings, an expectation of AUM growth is priced in. Should Fiera's sales continue to sputter, the firm could see a multiple re-rating that could hurt the share price. Equally, an equity market downturn or prolonged recession that leads to net redemptions for a sustained period would compel management to consider the level of the dividend.

For a small firm, the loss of key executive staff could have an impact on operations. With the recent replacement of the CEO, with Fiera's founder, there will be questions about the company's succession planning.

Investor Takeaways

Fiera is worth a look for its yield and potential reversion to growth. While the dividend yield and share repurchase plan alone will provide a nice return of capital to shareholders, I would like to see some momentum in AUM growth before buying. This is an interesting option for an investor with a long time horizon and the risk tolerance to wait out a turnaround while collecting a 9.4% dividend yield.

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