2023-12-06 15:52:33 ET
Summary
- BlackRock, Inc., with a 230% 10-year return, excels in dividends, buybacks, and financial stability.
- Focusing on ETFs and private markets, BlackRock anticipates industry growth, leveraging innovation and technology.
- With an AA- credit rating, BlackRock's P/E ratio, and expected EPS growth, project >11% annual returns through 2025.
Introduction
It's time to discuss a stock I have never discussed before. That company is BlackRock, Inc. ( BLK ) , one of the world's biggest asset managers.
Not only does this company offer some of the best exchange-traded funds, or ETFs, on the market, allowing investors to diversify and invest without having to put in a lot of work to generate good returns, but it is also a highly controversial company.
The company has a massive network of alumni who hold important jobs in global governments and large corporations, and it has become the face of the corporate ESG movement.
Earlier this year, the Australian Financial Review wrote an article covering the company's involvement in these business trends.
This year alone, Republican lawmakers in 37 states have proposed at least 167 laws targeting ESG (most have not passed). Some states have blacklisted firms like BlackRock from handling their investments. Call it defunding the climate police.
Fink has become the right wing’s bête noire. This was made clear last year when Peter Thiel, a venture capitalist and conservative rabble-rouser, attacked ESG at a Bitcoin conference in Miami, as Fink’s face stared out of the screen behind him. “ESG is just a hate factory,” he said.
With that said, while its ESG efforts may have hit a wall (although even that is debatable), the company remains in great shape.
BlackRock not only benefits from its bread and butter ETFs but also its ability to innovate using global partnerships, technology-enhanced services, and opportunities in private markets.
On top of that, it has a decent >2% dividend yield, consistent dividend growth , and an increasingly strong moat.
Although I am not a fan of the ETF industry (I like to build my own portfolio) and the fact that some players are getting so large that they gain tremendous power, this isn't about what I think but the company's ability to deliver value.
Given everything we are about to discuss in this article, there's no way I can avoid giving BLK shares a longer-term Buy rating.
So, let's get to it!
A Financial Dividend Growth Outperformer
When it comes to financial investments, I want to buy companies with wide moats. This usually excludes banks. Although I like banks as recovery plays during recessions, they tend to be poor long-term investments, as steep recession selloffs often ruin the total return picture.
That's why I focus on service providers like rating agencies, stock exchange operators, and companies like BlackRock.
Over the past ten years, the asset manager has returned close to 230%, beating the financials sector ( XLF ) by a wide margin. The banking industry ( KBE ) returned just 62%.
On top of that, the BLK ticker comes with a 2.6% dividend yield. That may not be as much as investors get when buying some high-quality banks (it explains why it has a "D" on the Seeking Alpha dividend scorecard ).
However, it comes with a payout ratio close to 54%, a five-year CAGR of 10.7%, and a track record of 14 annual hikes.
The company has never cut its dividend. During the Great Financial Crisis, the company kept its dividend unchanged when countless companies were forced to cut dividend distributions.
BlackRock - Includes 2023 YTD Numbers
Moreover, over the past ten years, BLK has bought back close to 12% of its shares. There are a number of stocks with more aggressive buybacks on the market. Nonetheless, this is a great number for a company with a yield close to 3%.
Over the past few years, the company has paid out between 60% and 95% of its earnings to shareholders. 2021 saw a lower payout ratio due to massive income gains.
Buybacks also helped the company to accelerate bottom line growth.
Over the past ten years, the company has grown its revenues by 5.9% per year. It has grown net income by 6.8% per year. Earnings per share were compounded at 8.4%!
The good news is that BlackRock is in a great spot to maintain consistent long-term growth.
BlackRock's Path To Long-Term Growth
I'm not breaking any news when I say that BlackRock makes most of its money from its ETF business.
USD in Million | 2021 | Weight | 2022 | Weight |
---|---|---|---|---|
Investment Advisory, Administration Fees, and Securities Lending | 15,260 | 78.8 % | 14,451 | 80.9 % |
Distribution | 1,521 | 7.9 % | 1,381 | 7.7 % |
Technology Services | 1,281 | 6.6 % | 1,364 | 7.6 % |
Investment Advisory Performance | 1,143 | 5.9 % | 514 | 2.9 % |
Advisory and Other | 169 | 0.9 % | 163 | 0.9 % |
The ETF business has been one of the best places to be, and it is highly likely that it will stay that way - ignoring short-term fluctuations due to economic challenges.
PWC estimates that the ETF market in the United States could reach $11 trillion by 2027, which would imply a 12.8% annual compounding growth rate! Even better, the United States is expected to be the slowest grower in the world due to its more mature financial markets. Other areas in the world are expected to grow even faster.
The same report highlighted four aspects that can turn ETF providers into beneficiaries of this trend. This is the advice the company would give ETF providers:
- Drive Innovation: Respond to market changes by innovating products and operations, leveraging automation and advanced technologies.
- Develop Retail Distribution Channels: Strengthen your presence with self-directed investors through online platforms, apps, and diverse ETF offerings.
- Explore Efficient Market Entry: Consider options like white label platforms, mutual fund conversion, acquisitions, and global distribution to enter ETF markets cost-effectively.
- Enhance Data Quality: Ensure reliable data for decision-making and disclosure, particularly in complex areas like ESG, through automation and ongoing due diligence of data providers.
BlackRock, which manages more than $9 trillion in assets, is increasingly focusing on these key drivers.
For example, the company sees a significant opportunity in the long-term trend of clients consolidating their business with fewer managers.
The company believes that the current period of portfolio redesign, influenced by policy uncertainty and rate hikes, will accelerate the consolidation trend.
BlackRock's focus on staying close to clients and providing insights positions it to benefit from clients seeking more comprehensive solutions from a trusted partner.
On top of that, the private markets platform is a key growth area for BlackRock, with nearly $3 billion of net inflows in the third quarter.
The company anticipates even bigger and better opportunities in private markets, driven by strong demand for illiquid alternative strategies.
BlackRock's investments in scaling the private markets platform, including bridging successor funds and seeding new fund launches, are expected to unlock future revenue and earnings potential.
The company expects private market industry assets to rise by 12% per year through 2027, growing to $18 trillion.
It is also using technology to improve its services and drive demand.
The demand for BlackRock's technology services continues to grow, with third quarter technology services revenue up by 20% compared to the previous year.
The sustained demand for technology offerings and large client renewals contribute to this growth.
BlackRock's commitment to low- to mid-teens annual contract value growth, driven by Aladdin's expanding technology capabilities, positions the company to capitalize on the increasing value proposition it presents for clients.
Aitor describes Aladdin (an acronym for Asset, Liability, Debt and Derivative Investment Network) as a comprehensive investment management and trading platform. But in practice, it is much more than that. Aladdin combines sophisticated risk analytics with comprehensive portfolio management, trading and operations tools on a single unified platform. It is used by thousands of investment professionals around the world. And it underpins a massive proportion of the world’s financial ecosystem. - KPMG .
Related to this, the acquisition of eFront aims to integrate the aforementioned public and private markets within the Aladdin portfolio system.
BlackRock sees opportunities in sectors such as global energy transition and retail alternatives, with a focus on ambitious infrastructure projects.
On top of that, despite economic challenges, its ETF business remains a growth driver, with $29 billion of net inflows in the third quarter.
BlackRock also expects an increase in iShares ETF flows as 2023 concludes, which aligns with the historical pattern of the fourth quarter being the strongest for ETF flows.
The company traditionally benefits from industry seasonality related to year-end rebalancing and tax planning, presenting an opportunity for increased ETF inflows.
Additionally, With money market funds earning yields not seen in nearly two decades, BlackRock aims to engage with clients using cash not only for liquidity management but also to earn attractive returns.
The current macro environment, while causing some clients to pause, presents an opportunity for BlackRock to attract clients seeking both safety and returns on their cash.
In other words, BlackRock is in a fantastic position to benefit from its existing business and growth opportunities that should allow it to capture growth in a highly fragmented market.
This brings me to the valuation.
Valuation
On top of being a strong business, next year, the company is expected to end up with close to $3 billion in net cash , meaning more cash than gross debt.
Hence, it has an AA- credit rating, which is one of the strongest ratings in the world - across all sectors.
After rising 26% from its 52-week lows, BLK shares currently trade at a blended P/E ratio of 20.5x.
The long-term normalized valuation multiple is 21.0x.
This year, EPS is expected to grow by 4%, followed by 1% growth in 2024 and 14% growth in 2025. Needless to say, these numbers are subject to change.
A return to its normalized valuation by incorporation of expected EPS growth rates and its dividend could pave the road for >11% annual total returns through 2025.
Since 2003, BLK shares have returned 16% per year!
If I were in the market for BLK, I would likely wait for a pullback before buying. Shares have returned more than 14% over the past four weeks, mainly benefitting from market expectations that the Fed will start cutting rates rather aggressively next year.
As I discussed in my 2024 outlook , I doubt that will happen.
On a long-term basis, I'm bullish on BLK, as it seems to be a powerhouse that will only improve its moat in the years ahead, letting shareholders benefit from consistent dividend growth, buybacks, and earnings growth along the way.
For further details see:
It May Be Pointless To Bet Against BlackRock