- SEI Investments is an overlooked dividend aristocrat.
- Shares of SEI Investments are attractively valued.
- Investors may want to consider SEI Investments as a medium-term-play on the market recovery.
Introduction
As a dividend growth investor, I am constantly screening for additional income-producing opportunities. Sometimes I acquire stocks I own to take advantage of their attractive valuation. On other occasions, I try to diversify further to limit the risks of relying on a limited number of shares.
In this article, I will look into the financial sector. I lack exposure primarily to financials and consumer staples companies. One of my favorite segments in the industry, especially when the markets are low, is the asset management companies. I own shares in T. Rowe ( TROW ) and Ameriprise Financial ( AMP ). I also have analyzed BlackRock ( BLK ) lately. In this article, I will study SEI Investments ( SEIC )
I will analyze the company using my methodology for analyzing dividend growth stocks. I am using the same method to make it easier to compare researched companies. I will examine the company's fundamentals, valuation, growth opportunities, and risks. I will then try to determine if it's a good investment.
Seeking Alpha's company overview shows that:
SEI Investments Company is an asset management holding company. The firm provides wealth management, retirement and investment solutions, asset management, asset administration, investment processing outsourcing solutions, financial services, and investment advisory services to its clients. Through its subsidiaries, the firm manages separate client-focused portfolios. It also launches and manages equity, fixed income, and balanced mutual funds.
Fundamentals
The sales of SEI Investments more than doubled over the last twelve months. The company enjoyed its fastest growth during the pandemic, as more people showed interest in investments, and closed stores led to more disposable income. The company grows mainly organically as the assets under management grow, while its M&A activity aims to improve its technological capabilities. In the future, analysts' consensus, as seen on Seeking Alpha, expects SEI Investments to keep growing sales at an annual rate of ~3% in the medium term.
The EPS (earnings per share) has grown much faster. The EPS has almost quadrupled over the last ten years. EPS has grown at a much quicker rate compared to the sales. EPS grew faster as the company, in addition to the higher sales, executed significant buybacks and became leaner and more efficient, thus enjoying higher margins. In the future, analysts' consensus, as seen on Seeking Alpha, expects SEI Investments to maintain a flat EPS in the medium term as it waits for a market recovery.
The dividend is one of the company's points of strength. The dividend has increased for more than 30 years, meaning that the company is a dividend aristocrat. The current dividend is safe and unlikely to be cut as the current payout ratio is below 20%. The dividend yield is not too attractive at 1.5%. Still, the company has plenty of room to grow, and investors should expect another increase in the following announcement as it increases the dividend twice a year.
In addition to the dividend, the company also returns capital to shareholders via share repurchases. Buybacks are an efficient method to return capital to shareholders. They are beneficial when companies grow, supplement EPS growth, and support long-term returns. Over the last decade, SEI Investments bought back 22% of its shares outstanding, supporting the high EPS growth.
Valuation
The company's P/E (price to earnings) ratio stands at 13 when looking at 2021's actual earnings and 14.6 when considering the forecasted earnings for 2022. The EPS in 2022 will be slightly lower as the company faces a bear market which decreases its assets under management. Still, paying 14.6 times earnings for a dividend aristocrat with a long growth history seems fair.
The graph below from FAST Graphs also implies that the company is reasonably valued and maybe even attractively valued. The average valuation of SEI Investments over the last two decades was 21.8, and the current valuation is significantly lower. The average growth rate during that period was 9%, which is higher than the current forecast, but this is a challenge associated with the negative market returns. As returns return to normal, there will be room for multiple expansions.
To conclude, SEI Investments is a solid company. Solid sales growth leads to robust EPS growth, which pays for generous dividends and buybacks while growth is maintained. These great fundamentals are coming at what I believe to be a fair price and even slightly undervalued. Paying less than 15 times earnings for a dividend aristocrat like SEI Investments makes sense.
Opportunities
The first opportunity for SEI Investments is its diversification. In addition to its more classical asset management services, the company offers tech platforms to clients to manage their operations better. It allows the institutional clients to streamline investment, execute strategy and work with millions of clients. These revenues are less sensitive to market fluctuations as they come as subscriptions. It also makes SEI Investments more "sticky" as it offers a one-stop shop.
Another growth opportunity is M&A activity. The company focuses its M&A activity on technological capabilities to enhance its tech offering. Only one major acquisition aimed to increase the assets under management, Huntington Steele, in 2018. The rest aimed for better tech and international expansion. The company has almost no debt, and with many tech companies and startups craving capital, it can take advantage of the situation and acquire them.
International expansion is another growth possibility for SEI Investments. The company has offices in less than ten countries. Only 15% of its sales come from markets outside the United States. Therefore, there is much room for expansion as the company rolls more services across the globe. It seeks new markets and more products in existing products.
Risks
The company has $1.3T in assets under management. The company is susceptible to market fluctuations, and the market decline directly impacts its earnings. In a recession, there may be a long period of low market returns, and the stock market decline may continue further with lower earnings. It is the most significant risk for SEI Investments in the short and medium term.
Moreover, the company is also operating in a highly competitive business environment. Many asset managers enjoy a more extensive scale compared to SEI Investments. They can leverage their scale to offer more products for better prices. SEI Investments has its tech business which supports its stickiness and offers added value, but competition is still a long-term challenge.
Mutual funds are a source of income for SEI Investments. Mutual funds are less favorable nowadays as investors favor low-cost index funds and ETFs. The company charges high fees for mutual funds as it offers active management. The challenge here is maintaining high performance for a long to justify the higher prices. It forces the company to keep excelling at maintaining its current assets under management, let alone increase them.
Conclusions
SEI Investments is an excellent company for dividend growth investors with a long investment horizon. The company has strong fundamentals with increasing sales that lead to rising EPS that fuel dividend growth and buybacks. This package comes at what I believe to be a fair and even slightly attractive valuation.
The company has limited risks that are not unique to the company, but the entire industry is dealing with them. Its technological offering allows it to differentiate from the competition. Therefore, I believe that SEI Investments is a BUY at the current prices for investors seeking an asset manager with lower volatility. I recommend adding gradually to the position.
For further details see:
SEI Investments Is Another Decent Dividend Growth Stock