This blue-chip stock has increased its dividend: should you buy it?
Othen the asset manager black rock (NYSE:BLK) released fourth quarter earnings and earnings in mid-January, the company also announced a strong 18.2% increase in its quarterly dividend from $4.13 to $4.88 per share.
This raises two questions: Can BlackRock afford such an increase? And should you buy the stock now? Let’s look at the operating principles of BlackRock, dividend distribution rateand evaluation to answer these questions.
BlackRock is a fundamentally sound company
BlackRock’s fourth quarter results were mixed. Even so, the company had a strong quarter for its shareholders. BlackRock posted revenue of $5.11 billion in the fourth quarter, representing a growth rate of 14% over the prior year. However, the company narrowly missed the analyst consensus revenue estimate of $5.15 billion.
BlackRock’s revenue loss was arguably less of a bad reflection on the quarter than analysts were conditioned to expect a lot from the stock. Indeed, this shortfall was BlackRock’s first in the last 10 quarters.
The company’s average assets under management (AUM) during the fourth quarter were $9.75 trillion, up 19.6% year-over-year. BlackRock also ended the quarter with over $10 trillion in assets under management, making it the first asset manager to do so. The significantly higher asset base under management was more than enough to offset the strategic price cuts of certain products in order to remain competitive with other asset managers.
BlackRock’s non-GAAP (adjusted) diluted earnings per share (EPS) also edged up 2.4% from the prior year period to $10.42. That topped the analyst consensus of $10.16 in adjusted diluted EPS for the fourth quarter. So how did BlackRock achieve its 10th consecutive quarter of beating the average analyst-adjusted diluted EPS forecast?
The answer lies in robust average AUM and revenue growth of the business. As a result of this growth, BlackRock’s employee compensation and benefits increased 16.3% year-over-year (which historically represents about half of total operating expenses for BlackRock). company) to reach $1.56 billion. This is the result of a higher workforce and the 8% wage increase that took effect for all employees last September. In other words, BlackRock’s revenue growth was more than offset by increases in employee compensation and benefits. Wage increases hurt the company’s profitability in the fourth quarter. However, the good news is that strong salary growth for all employees should help attract the best and brightest minds to BlackRock. This should translate into outperformance relative to its asset manager peers over the long term.
Over the next five years, analysts expect the stock to post 13% annual earnings growth.
Payment can continue its rapid growth
BlackRock should produce good medium-term growth. But equally important is the fact that the stock’s dividend looks sustainable.
BlackRock reported $39.18 of adjusted diluted EPS last year. Compared to the $16.52 in dividends per share that were paid, this equates to a payout ratio of 42.2%. This payout ratio is only expected to increase slightly this year as analysts expect BlackRock to generate $42.52 of adjusted diluted EPS. Compared to the $19.52 in dividends per share that will be paid out this year, this equates to a payout ratio of 45.9%.
Given BlackRock’s payout ratio and projected earnings growth, the stock is expected to distribute teenage low-percentage dividend increases to shareholders over the next few years. Combined with a 2.4% above-market dividend yield, this is an attractive combination of growth and yield.
An average valuation for a good action
BlackRock can easily cover its dividend obligations. So that brings us back to the question of whether the stock is a buy right now.
At the current share price of $823, BlackRock is trading at a price-to-earnings (P/E) ratio of 19.4 for the current year. This is in accordance with the S&P500the forward price/earnings ratio of 19.2. Given that BlackRock’s growth potential is above average, the stock should command a larger premium than it currently does against the S&P 500.
This is why BlackRock is a fintech stocks under the radar which income and growth investors should consider buying at the current valuation.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.