2023-08-03 17:57:13 ET
Summary
- Morgan Stanley has a conservative approach to making money, focusing on wealth management and underwriting in the technology sector.
- The company has experienced slow but consistent growth and has a strong track record of raising dividends.
- However, there are risks involved, including market risk, credit risk, liquidity risk, operational risks, and systemic risk.
Morgan Stanley ( MS ) provides financial services throughout the globe. It operates through Institutional Securities, Wealth Management, and Investment Management segments and has a reputation as being more conservative than its competitors. When compared to Goldman Sachs which I also recently wrote about here , Morgan Stanley seems like the more mature older sibling. By focusing on wealth management over derivatives since 2011, MS has opted for a lower beta method of making money and it shows in the results.
Morgan Stanley isn’t afraid to mix it up with a little risk by underwriting in the risky but lucrative technology sector and has underwritten some of techs most famous names including Facebook and Google. This has been a boon to MS in the past and could be one in the future.
The company suffered large losses in 2000 and 2008. While Goldman Sachs decided to continue business as usual after these events, Morgan Stanley made significant changes to the business in 2011 and 2012 focusing on the more conservative model outlined above.
As we can see in the chart above those changes have led to slow but consistent growth and less risk to the downside.
Valuation
Morgan Stanley controls over a trillion dollars in assets making it a titan of the financial industry. Since 2018, they grew assets by about $347 billion dollars and liabilities only increased by $325 billion dollars. At this point their massive size means growth has to come a little slower, but they are still growing.
Their revenue growth has been relatively flat which is reflected in their share price remaining relatively stable. The earnings per share have come back to 2019 levels. These factors would lead us to believe that there will not be significant price appreciation in 2023 or beyond. The best you can hope for is a slow and steady rise. Morgan Stanley appears to be valued fairly at the current time and we rate it a hold.
The Dividend
Morgan Stanley has an excellent history of raising the dividend since they restructured the business model in 2011. They doubled the dividend in late 2021.
If I was a dividend growth investor, I would be interested in Morgan Stanley primarily because of the impressive rate of dividend growth over the last five years.
What might concern me a little is the possibility that the dividend might not be safe. The current payout ratio of 52.75% is high. Not as high as Washington Trust's ( WASH ) which I wrote about here , but probably still too high for comfort. We do not think the dividend is necessarily at risk because as a more conservative financial institution Morgan Stanley had some cushion, but the recent drop in earnings must have caught them slightly by surprise or they likely would not have increased the dividend so aggressively in 2021.
Risks
Like any titan in the financial landscape, Morgan Stanley contends with an array of risks. Market risk looms large, with fluctuating interest rates, exchange rates, commodity prices, and equity valuations posing threats to their investment portfolio and trading activities. Credit risk also remains a key concern, as it hinges on borrowers and counterparties meeting their obligations, affecting the firm's lending ventures and holdings in corporate and sovereign debt. It would be a mistake to overlook liquidity risk, a pivotal factor in their short-term funding reliance and the potential inability to liquidate assets swiftly to meet obligations.
As a value investor, I'm keenly aware of the ever-present operational risks stemming from internal processes, system failures, and human error, which can reverberate through the institution's financial well-being and reputation. Complying with stringent regulations adds another layer of risk, one that Morgan Stanley must tread cautiously to avoid regulatory penalties and reputational damage. I currently believe Morgan Stanley’s commitment to low beta profits should help them avoid the worst risks, but you can’t neglect the systemic risk, a menacing specter that haunts the stability of the entire financial realm, and cyber threats, which present formidable challenges in safeguarding sensitive data and preventing cyber-attacks. Navigating these risks demands robust risk management practices, a steadfast commitment to financial prudence, and transparency.
Conclusion
While Morgan Stanley faces an array of risks in its pursuit of financial excellence, as a value investor, I believe there is much to admire about this stalwart of the financial industry. If you like slow and steady growth, Morgan Stanley has what you need. If you like dividend growth, Morgan Stanley has what you need. If you are looking for capital appreciation, I would look elsewhere or wait for a lower entry.
As we navigate the ever-changing financial markets, it is crucial to approach the potential risks with a measured perspective, keeping in mind that with risk comes opportunity. The truth is Morgan Stanley just doesn’t take enough risks to provide many opportunities. At least in my book.
What Morgan Stanley does offer is an established track record, global presence, and commitment to robust risk management practices that should position it well to weather challenges and capitalize on lucrative prospects in the future.
As a value investor, I remain optimistic about the long-term prospects of this financial titan and will be keeping a watchful eye on its trajectory, always ready to seize opportunities that present themselves on the horizon. I currently rate Morgan Stanley a hold, but I would be interested if the stock drops precipitously. As always, please do your due diligence before buying any stocks and thank you for reading and commenting.
For further details see:
Morgan Stanley: Dividend Growth But Not Much Else To See Here