VRTS - Virtus Investment Partners: AUM Growth And Dividends Characterize A Buy Here

2023-08-28 04:01:00 ET

Summary

• Virtus Investment Partners, Inc.'s AUM has grown steadily to $168 billion, driven by solid market performance and the addition of AlphaSimplex.
• The company's current valuation offers a slight discount to the sector, making it an appealing investment opportunity for both growth and dividend income-oriented investors.
• VRTS has a strong company structure, with tailored portfolios and an ROE of over 16%, and is expected to continue growing as market conditions remain positive.

Introduction

The AUM for Virtus Investment Partners, Inc. ( VRTS ) has been growing steadily and as of the last report it sits at $168 billion, up from $154 billion because of solid market performance and the addition of AlphaSimplex. This might not be organic growth but still underscores the company's ability to generate solid returns in difficult market conditions. As the interest rates in the US begin to hopefully decrease sometime next year, I think the AUM for VRTS will be increasing as consumers become more positive.

The current valuation of the company offers a slight discount to the sector and that together with the dividend yield is making it a very appealing investment opportunity right now, both for the growth-oriented investor, but also the dividend income-oriented one. Buybacks are common practice for the company and I don’t see it stopping anytime soon, not as long as VRTS can generate an ROE of over 16%. Issuing a buy rating for VRTS right now.

Company Structure

VRTS has grown at a solid rate in the investment management landscape, offering its expertise to a diverse range of individual and institutional clients. With a commitment to tailored solutions, the firm initiates distinct portfolios that align with the unique preferences and goals of its clients. These portfolios span the spectrum of equity and fixed-income assets, fostering a holistic approach to wealth management. The focus on delivering a robust investor return is maintained as an ROE of over 16% is achieved by the company. This underscores the commitment to both issuing a dividend and buying back shares at an impressive rate.

One of the key points to look at with VRTS is the AUM the company has. It has been growing at a decent rate to $168 billion right now and I expect it to continue doing so as the market conditions remain positive if interest rates go down, consumer incentives increase and savings are likely to increase. This would be beneficial to VRTS as inflow volumes would likely grow. As for the ROA of VRTS, it is heavily beating out the second average of 1.14% as its nearing 4% rapidly. This should, in my opinion, be rewarded with a higher valuation than it currently has, but time will tell whether that will become true or not.

The addition of AlphaSimplex for VRTS was showcased to not severely deleverage the balance sheet in my opinion as the addition of $50 million of debts wasn't such a big increase for the already $263 million debt the company held. Cash sits still strongly at $251 million and is sufficient to almost pay off all debts which of course for any company is a strong position to be in.

Earnings Transcript

From the last earnings call by VRTS the CEO George Aylward had some good insight and comments on the company's recent performance that I think are worth highlighting here.

• Our second quarter financial results reflected the impact of market appreciation on AUM levels particularly near the end of the quarter as well as the addition of a new affiliate at the beginning of the quarter. The operating margin was 32.3%, up sequentially from 26.8%, primarily due to the impact of seasonal employment expenses in the prior quarter. Earnings per share as adjusted of $5.43 increased from $4.20 in the first quarter. Excluding prior quarter seasonal items, earnings per share as adjusted increased 2% sequentially.

The inorganic growth the company saw because of the addition of AlphaSimplex is great to see but margin improvements for operations are also a deciding factor for my buy case for the company. If this can be kept up then I think the investor yield here is very appealing and a continuation of increasing dividends seems very likely. For Q3 I think the spotlight should be on maintaining these results and possibly raising the bottom line sequentially somewhat as well. This will likely result in the share price continuing its trend upwards and getting in now will likely yield solid ROI.

Valuation & Comparison

I think that VRTS right now offers a fantastic dividend opportunity for investors and the GGM model above here showcases just that as well. I think an 8% terminal rate increase is justified given the track record the company has and the possibility for higher AUM and a continuation of the high ROE as well. For me, VRTS accentuates quality as a business, and with so much free capital to spend I think investors seeking a dividend income company will do very well with VRTS right now.

Risk Associated

In the current landscape, the financial markets are facing a significant challenge due to formidable macroeconomic and geopolitical headwinds. These external forces carry the potential to disrupt investor confidence and deter savers from engaging with the market, resulting in a cascading effect on the demand for wealth management services.

Furthermore, the emergence of strong macroeconomic and geopolitical headwinds introduces an elevated risk of asset impairment. Market conditions characterized by heightened uncertainty can lead to rapid fluctuations in asset values. This volatility, if left unchecked, could potentially expose investments to a greater risk of depreciation, challenging wealth managers to devise strategies that navigate the stormy waters of the financial landscape.

The mentioned factors of global economic qualities could also present challenges for investment managers aiming to bolster their earnings. Market uncertainties could potentially lead to a cautious approach among investors, potentially translating to lower transaction volumes and, consequently, impacting earnings generated through transactional fees. For VRTS though it has been very nice to see such solid AUM growth as that is indicative of a better consumer demand and market sentiment, so the risks currently seem limited and not sufficient to warrant anything but a buy case in my opinion.

Investor Takeaway

Consumer spending remains strong and I think VRTS will, once the interest rates begin to be decreased, see even stronger inflows of capital which will help them deliver even better earnings. Currently, the ROE is over 16% and this has enabled the company to grow the dividends the way it has over the last 5 years. I think it will continue and is therefore rating VRTS a buy right now for investors seeking a dividend addition with a quality asset base also.

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