2023-12-22 02:38:42 ET
Summary
- BEN is a cheap stock with a 4.2% dividend.
- The company has potential upside catalysts, including further integration of recent acquisitions, additional acquisition potential, share repurchases, and a growing alternatives business.
- Franklin Resources' strong position in the alternatives market is a key difference vs. traditional asset manager peers.
- BEN shares are trading mostly in line with traditional asset management peers despite the company's strong alternatives business.
- I am initiating a buy rating.
Franklin Resources ( BEN ) is a cheap stock by most traditional metrics. BEN trades at just 12.4x forward earnings and currently yields 4.2%. However, I do not generally view a cheap valuation alone as a sufficient reason to buy a stock. Instead, I prefer to see additional upside catalysts combined with an attractive valuation.
In addition to trading at very attractive levels, BEN also has a number of catalysts that I believe can drive share price appreciation. Upside catalysts include further integration of recent acquisitions, additional acquisition potential, alternative AUM growth, and an aggressive share repurchase program.
BEN stock is currently rated as a hold by Seeking Alpha analysts and sell by Wall Street analysts. Thus, I believe BEN represents an attractive contrarian investment opportunity.
Seeking Alpha
Further Integration Of Recent Acquisitions
BEN has employed an aggressive acquisition strategy in recent years. Key recent acquisitions include the 2020 acquisition of Legg Mason (~$806 billion of AUM), the 2022 acquisition of Lexington Partners (~$57 billion of alternatives AUM), the 2022 acquisition of Alcentra ( $38 billion in alternatives AUM), and the pending completion of a 2023 deal to acquire Putnam Investments ($136 billion of AUM.)
Through these four deals alone, assuming successful completion of the Putnam deal, BEN will have acquired ~$1 trillion in assets over the past 3 years. To put this into context, BEN's entire AUM as of fiscal Q4 2023 was $1.38 trillion.
At a high level, the logic behind these deals is to drive synergies due to scale. Revenue synergies include the ability to have BEN's large sales force market additional new product offerings while cost synergies include things such as consolidating back-end operations or merging similar funds to reduce costs.
The integration of large asset management companies can take a significant amount of time as clients are highly sensitive to change and back-end integrations can be fairly complex to execute. BEN CEO Jennifer Johnson and CFO Matt Nicholls added commentary on the Q4 earnings call :
Well and I would just add, Mike, as you know, we've done a lot of acquisitions. And I think one of the reasons they work well is, we take our time on some of the integration. And so there's opportunity, obviously, we'll be integrating Putnam into the -- into our environment. And even some of the Legg Mason SIMs are -- have an opportunity to integrate which we think will simplify the environment...
These things take time. As Jenny mentioned, there won't be any additional change in 2024. That's a step change in terms of our expense, in terms of our expenses around the operation. But I think going into '25, '26 or longer term, not only do we have the opportunity to be more efficient across the organization, bringing things closer together in an effective way but also, it's an opportunity to modernize, to reduce CapEx, to make sure that longer term, we're in a position where we can scale at lower expenses with the right partners.
Currently, BEN has a relatively low-profit margin compared to peers such as BlackRock ( BLK ), T. Rowe Price ( TROW ), Invesco ( IVZ ), and Janus Henderson Group ( JHG ). For this reason, I believe BEN has an opportunity to become much more efficient over the next few years as acquisition integration deepens and the company closes on the Putnam deal.
Additional Acquisition Potential
While BEN has been very busy with a number of acquisitions lately, I do not believe this would prohibit other key acquisitions. The company has said it is open to deals even after the recent Putnam deal was announced.
In particular, I believe BEN is likely to continue its acquisition strategy in the alternatives space. While BEN got some exposure to private equity via its recent acquisition of Lexington Partners, much of that AUM is in secondary funds. The company's global private equity group has managed just $1.4 billion globally since inception. Thus, I believe the acquisition of an additional private equity company with a focus on primary funds could make a lot of sense.
A PE-focused private equity primary offering would nicely complement BEN's existing product suite which is more focused on private credit and PE secondaries. Even a large standalone private equity firm would have significant potential synergies via BEN's massive salesforce and distribution platform.
While it is difficult to speculate on specific targets large PE-focused firms such as Warburg Pincus or General Atlantic.
In addition to potential acquisitions of alternative asset managers, BEN is likely to continue its acquisition in the traditional asset management space as well. Smaller players that lack the scale necessary to compete in the current environment would be attractive targets.
For these reasons, I believe there is a good chance that BEN will announce additional acquisitions over the next year or two. I believe this would represent a positive development as BEN has the ability to achieve significant synergies due to its ever-growing scale.
Alternatives Share of AUM Has Grown
As of November 30, 2023, BEN had $257.5 billion in alternative AUM and $1.41 trillion in total AUM. Thus, alternative AUM currently accounts for ~18% of total AUM. This is up from ~8.5% of total AUM in December 2020.
In terms of fees, the alternatives business accounts for a greater share of total revenue given the higher fee structure vs. traditional products.
BEN's high proportion of alternatives AUM is much higher than most peers. BLK, TROW, IVZ, and JHG respectively have just 3% , 3.3% , 11.6% , and 2.9% alternatives share of AUM.
Given BEN's strong position in alternatives compared to peers, I believe BEN should trade at a premium given the better long-term prospects of the alternatives business. However, this is not currently the case as BEN is trading at a lower forward multiple than TROW, IVZ, and JHG. BLK trades at a higher multiple due to its strong passive business.
As the alternative business continues to grow on an outright basis and as a % of total AUM, I believe the stock is poised to receive a valuation re-rating higher due to alternative asset managers trading at higher valuations than traditional asset managers.
Aggressive Share Repurchase Program
Historically, BEN has been an active repurchaser of its own shares having reduced its share count by ~22% over the past decade.
During Q4 2023, BEN repurchased 7 million shares for a total cost of $187.6 million. This implies an average repurchase price of $26.8 per share.
On December 13, 2023, BEN announced a share repurchase authorization increase of 27.2 million shares. This brings the company's total buyback authorization to 40 million shares which represents ~8% of shares outstanding.
In addition to serving as a source of demand for shares of the stock, I also believe large share repurchases are positive as management is sending a signal to market participants that it believes shares are undervalued. Management has access to more information than the public and thus I view buybacks as an important bullish signal.
Attractive Dividend Growth Story
On December 12, 2023, BEN announced a 3.3% increase in its quarterly dividend to $0.31 per share. The company has raised its dividend each year since 1981, as impressive feat given the earnings volatility of the asset management business.
Currently, the stock has a dividend yield of 4.2% which is fairly attractive. Over the past 10 years, BEN has grown its dividend at an 11.9% CAGR. Dividend growth has slowed more recently as the company has focused on strategic M&A. However, BEN has still managed to grow its dividend at a 5.5% CAGR over the past 5 years.
Going forward, I expect BEN to continue growing its dividend over time at a rate mostly in line with the company's earnings growth rate.
Attractive Relative Valuation
BEN currently trades at just 12.4x FY 2024 earnings and 10.5x FY 2025 earnings. Comparably, traditional asset management peers such as TROW, IVZ, and JHG are trading at slightly higher multiples on average. Alternative asset managers such as Blackstone ( BX ) and KKR ( KKR ) are trading at much higher multiples. BLK trades at a higher multiple due to its significant exposure to passive which is a better business.
Given the fact that ~18% of BEN revenue comes from alternatives, I believe a blended peer valuation (18% BX/KKR average and 82% TROW/IVZ/JHG) provides insights into where BEN should be trading. Based on this analysis, I find a reasonable FY 2025 multiple is 14.3x which equates to a share price of $39.75. I view this as somewhat conservative as the alternatives business is likely more than 18% of BEN's net income due to higher fees though the company does not breakout income by product type.
Reasonable Valuation Relative To Historic Norm
As shown by the charts below, BEN is currently trading mostly in line with its own historical valuation range. However, I believe the company should trade towards the higher end of its recent historical range given the company's shift in business mix resulting in a much larger alternatives business. For this reason, I view BEN as highly attractive relative to its own historical valuation range.
Risks To Consider
One key risk that investors should consider is that the company has bitten off more than it can chew in terms of M&A. Integration of asset management businesses can be challenging and focusing on executing multiple deals over a short period of time is especially challenging. Despite focusing on multiple transactions over the past few years, BEN has consistently delivered better-than-expected earnings results. Moreover, BEN's share price has also outperformed traditional peers over the past 3 years.
If the company were to significantly miss earnings estimates over the next few quarters, I would be more worried that the company has bitten off more than it can chew. However, I do not expect this to be the case.
Another key risk to consider with BEN is that economic conditions change and markets suffer a period of weak performance. I believe BEN is more exposed than its traditional peers to a downturn in markets given its larger exposure to the alternatives business. Alternative products tend to change large performance fees which become more difficult to earn in challenging markets. Additionally, a prolonged period of economic weakness would likely result in falling public equity and fixed-income markets which would weigh on BEN's traditional businesses in the form of lower AUM. While I do not expect a significant economic downturn, I believe investors in BEN must continue to monitor this risk.
Conclusion
BEN is a cheap stock with a number of catalysts which I believe can drive shares higher.
The company is still in the process of integrating a number of recent acquisitions, and I expect further synergies to be realized over the next few years which may drive margin improvement to be more in line with peers.
BEN has proven to be an active consolidator in the asset management business, and I believe additional acquisitions are likely. Further acquisitions are likely to complement the company's existing business or provide opportunities to achieve synergies by consolidating weaker players in the traditional asset management business. I view additional acquisitions as a positive catalyst as they give the company more scale going forward which can create further efficiencies.
BEN has recently been an aggressive repurchaser of its own shares suggesting that management views that stock as undervalued. I expect the company to continue being aggressive with repurchases over the next few quarters. Additionally, the company has a very long history of rewarding investors with a stable and growing dividend.
In terms of valuation, BEN is trading at a cheap valuation which is mostly in line with traditional asset manager peers. However, I believe BEN should be trading at a moderate premium to these companies due to the company's large exposure to the alternatives business which offers better long-term growth prospects.
For these reasons, I believe BEN is attractive at current levels and I am initiating a buy rating.
For further details see:
Franklin Resources: A Value Play With Catalysts