RJF - Raymond James: A Terrific Wealth Manager For The Long Run

Summary

• Raymond James is well-positioned to take advantage of the growing financial services and wealth management demand.
• It's strongly benefitting from loan growth and higher interest rates.
• I also highlight the dividend, share buybacks, valuation, and other important points.

The market appears to be back in full-risk on mode, as many tech stocks that were shunned by investors last year have seen a decent bounce to start the year.

However, that doesn't mean they're out of the woods from a business fundamentals perspectives. This is reflected by Apple ( AAPL ) releasing a disappointing earnings report this week, showing a 5% YoY drop in revenues.

Moreover, the tech-fueled rally this year appears to have been funded by non-tech sectors such as financials. This includes Raymond James Financial ( RJF ), whose share price hasn't budged much at all since the start of the year. In this article, I highlight the attributes that make RJF an attractive value stock to buy at current levels.

Why RJF?

Raymond James Financial is a financial services firm that provides a wide range of investment services, including wealth management, investment banking, and asset management. The company was founded in 1962 and has since become one of the largest independent financial services firms, with a presence in the U.S., Canada, and the UK with over $1 trillion in assets under administration.

RJF demonstrates durable attributes that makes it a worthwhile holding over the long run. This is reflected by its solid revenue trajectory over the past 20 years, through multiple economic cycles, including the Great Recession. As shown below, RJF's revenue has more than doubled over the past decade.

Meanwhile, RJF continues to demonstrate sound results during its fiscal first quarter, with Domestic Private Client Group net new assets of $23 billion, representing an impressive 9.8% annualized growth rate. While revenue was flat compared to last year, RJF is demonstrating strong operating leverage, as return on common equity was a robust 21% and annualized adjusted return on tangible common equity was 26%. Moreover, RJF's record loan growth of $44 billion, up 69% over last year, and higher interest rates contributed to net income growth of 14%.

Looking ahead, RJF is well-positioned to take advantage of the growing demand for financial services and wealth management, both in the United States and globally. That's because over 80% of RJF's net revenue comes from the more stable wealth and asset management and traditional banking, with less than 20% coming from the more volatile capital markets, as demonstrated during 2022.

In addition, Raymond James Financial is looking to expand its presence in new markets and is exploring new distribution channels, such as online investment platforms, and should continue to benefit from rate hikes. This is supported by the Federal Reserve Chairman stating this week that there will be "ongoing rate hikes". Plus, Morningstar sees potential for capital markets to bottom this year and for continued rate hikes down the road, as noted during its recent analyst report :

Given the potential for a recession in 2023, capital markets revenue will likely remain subdued for much of 2023. On the brighter side of things, while capital markets revenue should remain depressed, it’s also likely near bottoming, and asset prices that determine client assets in the wealth management group should also be bottoming.

Additionally, in the near term, most people believe U.S. short-term interest rates are moving higher, and Raymond James’ balance sheet is positively affected by short-term interest rates. Given Raymond James’ relatively lower proportion of capital markets revenue, its companywide revenue should hold up better than many other firms'. Raymond James’ bank will also receive a boost from rising interest rates.

Importantly, RJF maintains a strong BBB+ rated balance sheet. While its 1.5% dividend yield isn't anything to write home about, it's well-protected by a low 19% payout ratio and comes with a 5-year dividend CAGR of 19%, driven primarily by robust increases over the past couple of years.

Moreover, RJF is returning value to shareholders in the form of share buybacks, repurchasing 1.3 million shares in the last reported quarter for $138 million, and it recently authorized share repurchases of up to $1.5 billion. These share repurchases could be rather accretive, at the current forward PE of 11.2, equating to a 9% earnings yield.

Lastly, I see value in RJF at the current price of $108.83 and blended PE of 13.2, sitting below its normal PE of 14.0. Plus, analysts expect an 11% EPS growth rate next year and have a consensus Buy rating with an average price target of $126 , translating to a potential near-term total return in the high teens.

Investor Takeaway

Raymond James Financial is an attractive stock for those seeking exposure to a big player in the financial services sector. RJF offers higher exposure to wealth and asset management and traditional banking, which come with more steady revenue streams. Moreover, it's trading below its historical PE valuation and seeks to return capital to shareholders through both dividends and share buybacks. As such, I find RJF to be a worthy stock at present for total return investors.

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