Dividend Aristocrats In Focus Part 14: Franklin Resources

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Franklin Resources (BEN) manages the Franklin and Templeton families of mutual funds.  The company was founded in 1947 in New York by Rupert H. Johnson, Sr., who previously ran a brokerage firm on Wall Street.

He named the company after founding father Benjamin Franklin, because Franklin epitomized the ideas of frugality and prudence when it came to saving and investing.

Franklin Resources has paid increasing dividends for 35 consecutive years.  The company’s long dividend history makes it a member of the exclusive Dividend Aristocrats Index – which has historically outperformed the market.

Source:  S&P Fact Sheet

This performance makes sense when you think about it…  High quality businesses with the ability to pay rising dividends over time should perform better over multi-year stretches, all other things being equal.  You can see a full list of all 50 Dividend Aristocrats here.

Franklin Resources is one of 5 Dividend Aristocrats in the Financial Sector.  The company’s sustained success in a relatively volatile sector and industry speaks volumes about the prudence of the company’s management.

But…  ‘Past performance is no guarantee of future success’, as the well-told financial disclaimer goes.  Will Franklin Resources sustain its long track record of growth?

Keep reading this article to learn more about the investment prospects of Franklin Resources.

Franklin Resources – Business Overview

Franklin Resources is a financial services company. It offers a broad suite of services, and has over $770 billion in assets under management. Franklin Resources is a highly diversified company. It is diversified both in terms of its financial services as well as geographic regions. The company has offices in 35 countries and operations in more than 180 countries around the world.

Diversification by asset class:

  • 41% equity
  • 41% fixed income
  • 17% hybrid
  • 1% cash management

Geographic diversification:

  • 68% United States
  • 15% Europe, Middle East, & Africa
  • 10% Asia-Pacific
  • 4% Canada
  • 3% Latin America

Type of investor diversification:

  • 73% Retail investors
  • 25% Institutional investors
  • 2% High net worth investors

Franklin Resource’s diversification has helped the company generate steady growth over a prolonged period of time. Over the past 10 years, Franklin Resources grew earnings-per-share by 5.9% compounded annually. Its earnings growth allowed the company to increase its dividends declared by 14% compounded annually in the same period.

The company currently has a payout ratio of just 25%, so dividends will likely continue to grow faster than earnings for some time.

Franklin Resources attributes some of its impressive long-term growth to its experienced financial professionals. Franklin Resources prides itself on hiring financial experts with more experience than the industry averages.

Franklin Resources

Source: 2015 Annual Report, page 9

Last year was a difficult one for the company. Franklin Resource’s revenue and earnings-per-share decreased by 6% and 13%, respectively. Management attributed this to a difficult macro-economic climate, characterized by under-performance of a few of the company’s flagship funds. In addition, the company noted heightened market volatility.

Since Franklin Resources is a financial services company, its assets under management and financial performance is reliant on supportive financial markets. Periods of market downturns, geopolitical risk, or other causes of elevated market volatility can have a rapid, pronounced effect on the company.

The negative effect is seen in both falling product sales as well as increasing redemption activity. Not only that, but as a multinational company, Franklin Resources was also hit by the strong U.S. dollar last year.

Franklin Resources’ various headwinds have caused its stock price performance to significantly trail the S&P 500 Index over the past five years.

Franklin Resources

Source: 2015 Annual Report, page 7

Unfortunately, these difficult conditions have lasted into 2016. Over the first nine months of 2016, Franklin Resources’ revenue and earnings-per-share declined by another 18% and 21%, respectively.

Growth Prospects

One of the most important growth catalysts for Franklin Resources moving forward is the need for retirement planning, particularly in the U.S. market. Many economists and financial advisors have raised awareness of a retirement crisis.

There are millions of people retiring every year in the U.S., particularly among the Baby Boomer generation. As the retirement planning landscape has shifted over the past several decades from defined benefit to defined contribution plans, workers are having to take a more active role in their retirement planning.

As a major financial services firm with nearly three-quarters of its business in the U.S., Franklin Resources is ideally situated to capitalize on the need for more involved financial planning. The company is seeing significant growth in its defined contribution business as a result.

This helped Franklin Resources generate $3 billion of operating profit and a 38.9% net profit margin in 2015.

On the downside, the industry is slowly shifting away from more expensive mutual funds and investment advisors to lower cost ETFs and ‘Robo Advisors’.

Franklin Resources (high) profit margins are slowly falling.  They reached a high of 43% in 2011.  The company’s 2016 profit margin is expected to be around 36%.

Competitive Advantages & Recession Performance

As one would expect for an asset management company, Franklin Resources sees steep declines in earnings during recessions.

The company’s earnings-per share-for the 2007 to 2009 recession and subsequent recovery are shown below:

  • 2007 earnings-per-share of $2.37
  • 2008 earnings-per-share of $2.24
  • 2009 earnings-per-share of $1.30
  • 2010 earnings-per-share of $2.12
  • 2011 earnings-per-share of $2.89

As you can see, earnings-per-share fell steeply in 2009 during the worst part of the most recent recession.

As asset values decline, the company’s management fees fall.  People tend to liquidate their investments or sell out due to fear during recessions, which further reduces assets under management for Franklin Resources.

The company saw a nearly 50% decline in earnings per share from 2008 to 2009.  The company rebounded quickly, and earnings per share reached new highs by 2011.

Franklin Resources competitive advantage is based on the performance of its investment products and its brand reputation.  If the company were to post consistent weak performance, customers would leave, and brand equity would slowly erode.  The company’s competitive advantage is slowly weakening as the financial industry leans toward lower cost, lower ‘touch’ solutions like Robo Advisors and ETFs.

Valuation & Expected Total Returns

Franklin Resources had a difficult year last year, but the good news is that the stock is cheap…

Franklin Resources stock had a price-to-earnings ratio of just 12.8. This is around half the average price-to-earnings ratio of the S&P 500 Index, which stands at 24.7.

Furthermore, Franklin Resources is cheap compared with its own historical average. Since 2000, Franklin Resources stock has traded at an average price-to-earnings ratio of 14.5.

As a result, investors could consider the stock to be undervalued.  On the downside, the stock suffers extreme drawdowns during recessions.  Franklin Resources stock fell from a high of ~$47 in 2007 to a low of under $13 during the worst of the Great Recession in 2009.  While the stock appears cheap today, it will likely be much cheaper when the next recession rolls around (whether that’s in 6 months or 6 years).

Franklin Resources stock currently has a 2.1% dividend yield.  I expect earnings-per-share growth of around 4% to 5% a year going forward, in line with historical results.  Much of this growth will come from share repurchases.  The company has reduced its share count by around 2.5% a year over the last nine years.  The company’s current dividend yield plus its expected earnings-per-share growth rate gives investors expected total returns of around 6% to 7% a year, before changes in the valuation multiple.

Franklin Resources stock appears cheap at current prices.  Investors who are able to wait through recessions and hold until optimism pervades in the market will likely be able to wring out valuation multiple gains from Franklin Resources, which would further boost total returns.

Final Thoughts

Franklin Resources is a highly reputable company within the financial services industry. It has suffered with declining assets under management and earnings-per-share over the last year. But the company has a plan to resume growth, particularly in new international markets and in retirement planning services.

The stock has not performed well in recent months, but investors buying in at these prices will likely be rewarded for their patience. The stock is cheap, and the company has a long track record of annual dividend increases.  Franklin Resources has an above average rank using The 8 Rules of Dividend Investing.  The company scores well with its low payout ratio and reasonable valuation.  It does have higher than average volatility, and a merely mediocre dividend yield and expected growth rate, which hold the stock back from ranking higher.

Article by Bob Ciura


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