Waddell & Reed: Financial Turnaround?

03/16/2017 2:50 am EST


Ben Reynolds

CEO, Sure Dividends

Waddell & Reed Financial (WDR) was originally founded by two World War I veterans in 1937. Waddell & Reed provides investment management and financial planning services both in the United States and internationally, Ben Reynolds, editor of Sure Retirement.

The company currently has a market cap of $1.5 billion. The company’s share price has collapsed from over $60/share in 2014 to around $19 now. With that said, shares have rebounded from lows of around $15 seen in November.

Waddell & Reed’s stock price has plummeted due to declining assets under management (AUM). A large part of the company’s business is collecting asset management fees (usually over 1%) on its portfolio of mutual funds.

The mutual fund business model has come under pressure due to the growing prevalence of low cost ETFs and Robo Advisors. The firm’s assets under management have declined from $57.5 billion to $30.2 billion in just 5 quarters. This has caused the steep stock price decline.

A large portion of the decline is due to weak performance in the company’s flagship Ivy Asset Strategy Funds. These funds invest in multiple asset classes.

They tend to do better (on a comparative basis) when the market is falling versus during bull markets. A dip in the S&P 500 would likely show better performance for these funds, which would result in new asset inflows -– and more earnings.

In the 4th quarter of 2016 (1/31/2017), Waddell & Reed realized earnings-per-share of $0.27, versus $0.76 in the same quarter a year ago.

Continued AUM declines caused the drastic fall off. The company also recently announced (2/3/17) that it is coming out with 5 ETFs in a deal with ProShares. These are the company’s first passively managed funds.

The real question surrounding Waddell & Reed is whether or not the company can curb asset outflows in today’s more competitive investment landscape.

Despite heavy competition, the company actually managed to grow revenue from 2011 through 2014, with only modest declines in 2015. Waddell & Reed’s business is far from over.

It has proved it could compete in the past. It is likely (though certainly not a sure thing) that the company can turn its operations around again.

Waddell & Reed is riskier than most of our other top recommendations. However, there is also tremendous upside to the company if operations rebound (or stabilize).

If share prices return to previous highs of early 2014, the share price would more than triple. The company’s 9.9% yield is also enticing for dividend investors willing to take higher than average risks.

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