2023-09-25 11:28:22 ET
Summary
- BlackRock's Q2 results show continued growth with $80 billion of net inflows and a 1.8% increase in average AUM.
- Historical growth is very strong at 7.8% revenue and 9.9% EPS growth per share since 2010. This helps justify the 19.3x TTM P/E.
- BlackRock's great excess cash flows and valuation metrics suggest potential solid returns for investors.
BlackRock ( BLK ) remains a core holding of my portfolio and its 19.3x P/E continues to seem like a fair price given the great historic growth and leadership position of the company. Since I last wrote about Blackrock back May 2023, the company has posted a total return of 0.5% compared to the S&P 500's return of around 3.0%. With Blackrock's Q3 2023 quarterly results set to be reported on October 12th, let's get familiar with the Q2 year-to-date results and the closely watching for the growth in the asset base and which segments are driving it.
Latest Results Show Continued Growth
Despite flat revenue and operating income in Q2 2023, Blackrock continues to show it is making the right moves to grow long-term despite uncertain short-term market dynamics. This long-term growth is still evident through the $80 billion of net inflows in Q2 (excludes market fluctuations) to bring their industry leading growth in new AUM for the year to $190 billion. Average AUM for the quarter, including market fluctuations, was $9,187 billion an increase of 1.8% from $9,022 billion in the prior year quarter. The $190 billion net inflows YTD signifies around 4.1% annualized growth excluding market fluctuations based on the Q2 2023 average AUM.
Due to the impact of market movements over the TTM average AUM, revenue decreased 1% to $4,463 million and operating income decreased 3% YoY to $1,615 million. SG&A expenses of $517 million were kept under control (down 2.1% since Q2 2022 ) throughout the last year despite inflation. With operating income relatively flat, the 28% increase in diluted EPS YoY to $9.06 (26% adjusted) reflects significantly higher nonoperating income in the current quarter driven by net gains on investments of $231 million in the quarter compared to a $314 million loss in the prior year quarter.
The $80 billion of net inflows in Q2 was driven by fixed income products which were $43.8 billion of the total with cash management and multi-asset growing $17.4 and $23.5 billion, respectively. Equity products and liquid alternatives saw net outflows of $4.3 and $2.5 billion, respectively. On the client type side, ETFs continued to drive the growth with $48.0 billion of net inflows in the quarter followed by cash management inflows of $23.5 billion.
Net Inflow Breakdown at BlackRock (from Q2 2023 results) | New Inflow Breakdown at BlackRock (from Q2 2023 company results) |
In addition to declaring a dividend of $5.0 per share in July 2023 (paid recently September 22 to investors) the company also returned $375 million through share repurchases in the latest Q2 2023 quarter. At the current $98.6 billion market capitalization, this $375 million represents approximately 1.5% annualized signaling total cash returns to shareholders including the current 3.0% dividend yield around 4.5%.
During the latest quarter, Blackrock also announced a joint venture with India's Jio Financial Services to deliver tech-enabled access to affordable, innovative investment solutions for millions of investors in India. As laid out in the press release, the partnership aims to transform India’s asset management industry through a digital-first offering and democratize access to investment solutions for investors in India. This JV shows Blackrock making the necessary global strides to continue their terrific growth and cement their economies of scale.
A Highly Profitable and Growing Company
BlackRock's position as the largest global asset manager with a diverse product offering has allowed the company to generate superior returns. While the company is cyclical along with the stock market due to it earning fees on AUM, operations have consistently remained profitable over the past 14 years, including the financial crisis. Since 2008, the company has achieved an average return on equity and return on invested capital of 11.2% and 9.6% respectively. This level of profitability is below my rule of thumb of 15% ROE but right at my more important unleveraged ROIC rule of thumb of 9%. The close approximation of ROE to ROIC is an indication of BlackRock's low financial leverage. These return figures allow me to be confident that, in my opinion, the company is able to maintain and continue to increase its intrinsic value in the future.
Historical Profits & Growth at BlackRock (compiled by author from company financials)
What does Growth Look Like?
On the growth side, book value per share has grown from $102.10 in 2008 to $264.67 to end the latest quarter, which when combined with the dividends paid out from equity, has averaged growth of 11.0% annually and further supports the ROE and ROIC averages. Also noteworthy is that revenue per share has grown at an average rate of 7.8% over the past 12 years and EPS has grown by 9.9%. These are fantastic growth rates well above GDP growth and highlight the strong economic moat BlackRock has in the asset management industry.
Growth on a Per Share Basis at BlackRock (compiled by author from company financials)
What does a Sustainable Growth Rate look like for BlackRock? And is it Relevant?
A company's sustainable growth rate is the growth that can be achieved without changing the capital structure of the business. With an average ROE of 11.2% as discussed earlier and a dividend payout ratio of 59% over the TTM, BlackRock's sustainable growth rate would be calculated at 4.7% (11.2% ROE x [100% - 59% payout rate]). We will take this long-term growth rate and add it on top of the earnings yield we will discuss next.
This is a nice and high growth rate but below what historical revenue and EPS growth rates discussed earlier have been. The sustainable growth rate might not be too relevant for an asset-light business such as BlackRock which does not need additional capital to grow. BlackRock's strengths lie in its operational and technological capabilities as well as the human capital and strong brand name attached to its investment products.
Great Excess Cashflows from a Market Leader
Strong businesses with economic moats such as Blackrock are able to generate great cash flows beyond what is needed to fund operations. With capital expenditures and acquisitions taking up an average of only 6% and 11% of cash flow from operations, respectively, since 2010, this leaves approximately 83% to be returned to investors in the form of dividends and share repurchases. With average cash flow from operations of $4.5 billion over the past three years, this 83% would imply free cash flow to shareholders of $3.7 billion for around a 3.8% free cash flow yield at the current $98.6 billion market capitalization.
Cash Flow Analysis of BlackRock (compiled by author from company financials)
Getting a Sense of Valuation
BlackRock's 19.3x TTM P/E ratio can also be expressed as a 5.2% earnings yield, but I also always like to examine the relationship between average ROE and price-to-book value in what I call the Investors' Adjusted ROE. Investors' Adjusted ROE examines the average ROE over a business cycle and adjusts that ROE for the price investors are currently paying for the company's book value or equity per share.
With BlackRock earning an average ROE of 11.2% over the past decade and shares currently trading at a price-to-book value of 2.49x when the price is $660.10 this would yield an Investors' Adjusted ROE of only 4.5% for an investors' equity at that purchase price, if history repeats itself. This is well below the 9% that I like to see, but we could add the 4.7% sustainable growth rate or 8.9% average of the historical growth rates discussed earlier on top which could increase the potential total return up to 9.2% or 13.4%, respectively. Below are the potential yields discussed in this article graphed.
Potential Shareholder Yields from BlackRock (compiled by author from market data and company financials)
Investor Takeaway
BlackRock is a great company that remains a core holding in my portfolio. The 19.3x TTM P/E can be justified by the high growth rates seen over the past few years as well as a sustainable growth rate calculation. The 4.1% annualized growth in YTD net new assets coming under management is what will continue to drive the long-term growth at BlackRock through market fluctuations and corrections. The company has great cash flow characteristics and I look forward to collecting the 3% dividend in addition to the share buybacks.
For further details see:
BlackRock: Great Shareholder Yields And Growth From This Core Holding