Franklin Resources is attempting to remedy its issues. The company announced that it agreed to acquire alternative credit manager Benefit Street for an undisclosed sum. Benefit Street has $26 billion in assets under management.
Franklin Resources reduced its diluted share count by 6% in fiscal 2018, which helps boost earnings-per-share growth. We expect the share count to decline another 2% in fiscal 2019.
Accretion to earnings growth is even stronger when the price of a stock declines. This is an advantage of consistent profitability—the company can use short-term dips in the share price as an opportunity to buy back its own stock at a lower price.
Competitive Advantages & Recession Performance
There are not many competitive advantages in the financial services industry. Asset management is a highly competitive business. The ability to retain clients depends largely on performance. If funds perform worse than their benchmarks, clients typically are quick to withdraw their funds.
However, Franklin Resources does have a few advantages over its competitors. The first, and perhaps most important, is brand recognition.
Franklin Resources has been in operation for 70 years. In that time, it has developed a strong reputation among investors, for its expertise and investment abilities.
And, Franklin Resources has huge assets under management, which allows the company to offer a wide range of investment opportunities to bring in clients.
Unfortunately, these competitive advantages do not help the company during recessions. Franklin Resources performed poorly during the Great Recession:
- 2007 earnings-per-share of $2.37
- 2008 earnings-per-share of $2.24 (5.5% decline)
- 2009 earnings-per-share of $1.30 (42% decline)
- 2010 earnings-per-share of $2.12 (63% increase)
As you can see, earnings-per-share fell steeply in 2009 during the worst part of the Great Recession. This should come as no surprise, since investment managers are not recession-resistant businesses.
During recessions, stock markets typically decline. This prompts many investors to sell their stocks out of fear, which causes lower assets under management and fees. That said, Franklin Resources recovered quickly, and saw earnings jump in 2010 and thereafter.
Valuation & Expected Returns
While Franklin Resources’ fundamentals have worsened in recent years, the good news is investors are not paying a high price for the stock.
We expect that Franklin Resources will earn $3.50 per share in fiscal year 2019. Based off the current share price of $30, the stock has a price-to-earnings ratio of 8.6. This is well below the S&P 500, which has an average price-to-earnings ratio of 19.9. Of course, the reason for Franklin Resources’ low valuation is its declining earnings.
If the company can grow its asset under management either through acquisition or improvement in its core business, the stock could see its price-to-earnings ratio rise to 12 by 2024.
If Franklin Resources can recover and return to earnings growth, the current price could prove to be a good value.
An expanding price-to-earnings ratio could generate significant returns. Separately, future returns will be due to earnings growth and dividends.
Franklin Resources has an attractive dividend yield of 3.4%, and the dividend payout appears to be secure. The following video discusses Franklin Resources’ dividend safety in further detail.
In addition, we forecast 3.8% earnings growth for Franklin Resources through 2024, slightly below the long term average. A potential breakdown of returns is below:
- 3.8% earnings growth
- 3.4% dividend yield
- 6.8% valuation expansion
Investors buying the stock now could see annual returns of 14% over the next five years if they believe that Franklin Resources can return to growth.
Final Thoughts
Franklin Resources’ assets under management again declined in 2018. It will likely take some time to recover what it has lost, but the company is still growing earnings, thanks to share buybacks. The stock offers a 3.4% dividend yield and the potential for annual dividend increases.
With a low valuation, solid yield and possibility of a higher valuation down the road, Franklin Resources could be a buying opportunity for value and dividend growth investors.
