Franklin Resources (BEN) was founded in 1947. The company manages the Franklin and Templeton families of funds and moved into ETFs for the first time in 2014, observes Ben Reynolds, growth and income expert and editor of Sure Retirement.
Franklin Resources has a market capitalization of $10.8 billion, and $623 billion in assets under management (AUM) as of the end of the fiscal third quarter. Franklin Resources produces about $7 billion in sales under normal conditions but should be closer to $5 billion this year.
Franklin Resources reported fiscal third-quarter earnings on July 28th, with results coming in substantially ahead of expectations for both revenue and profits. Total assets under management grew 7% versus the prior quarter. Franklin Resources did suffer more than $11 billion in net outflows, but that was more than offset by a $50 billion change in net market value thanks to the market rally.
Total operating revenue was $1.19 billion in Q3, down 19.5% year-over-year, and representing 76 basis points (bps) of assets under management on an annualized basis. Profits came to $349 million, or $0.70 per share on an adjusted basis; both of which were sizable improvements from the year-ago period, which saw $282 million and $0.55 per share, respectively.
Competitive Advantages & Recession Performance
Competitive advantages are difficult to achieve in the asset management industry, but Franklin Resources has established itself with a long and successful track record of industry outperformance. It has also increased its dividend every year since 1981, placing it on the list of Dividend Aristocrats.
Franklin Resources is not a recession-resistant company. As a financial services provider, its profits are highly correlated to market performance. For example, Franklin Resources’ earnings-per-share declined 5.5% in 2008, and another 42% in 2009 during the Great Recession.
That said, the company remained profitable, which allowed it to continue increasing its dividend throughout the recession, and earnings-per-share quickly recovered with 63% growth in 2010.
Growth Prospects, Valuation, & Catalyst
We believe Franklin Resources will continue growing. As the U.S. population ages, the need for retirement planning services will be greater.
Franklin Resources will also be able to grow AUM through acquisitions, such as the $4.5 billion acquisition of Legg Mason, which had AUM of over $800 billion prior to the merger. The deal presents cost synergies, as Franklin Resources expects to generate approximately $200 million in annual cost savings.
The deal with Legg Mason closed on July 31st, 2020, and the combined company now has more than $1.4T in AUM. Franklin reported another increase in assets under management for August, ending the month 0.9% higher at $1.44 trillion.
We expect Franklin Resources to generate adjusted earnings-per-share of $2.50 for 2020. Based on this, the stock trades for a price-to-earnings ratio (P/E) of just 8.7, somewhat below our fair value estimate of 10. Expansion of the P/E multiple could increase annual returns by 2.8% through 2025.
Combining valuation changes with 4.0% expected annual earnings growth and the 5.0% dividend yield, we expect total returns of 11.8% per year for Franklin Resources stock over the next five years.
