I’m adding a 8.4%-yielding asset manager to our high yield portfolio. The company is organized as a partnership; but if you don’t mind a little extra paperwork, AllianceBernstein (AB) combines high yield, high growth expectations and a strong chart into one attractive package, notes income expert Chloe Lutts Jensen, editor Cabot Dividend Investor.
AllianceBernstein is a New York-based investment manager. Very roughly, about 60% of AB’s clients are institutions (like pension funds) and 40% are retail investors. About 57% of clients are based in the U.S. (or at least their assets are). The company’s strength is active management.
While many investors are shifting to passive investing strategies — like index funds — AllianceBernstein is benefiting from a mini-renaissance in active strategies. In 2017, net flows into AB’s active strategies totaled $19 billion, with actively-managed fixed income funds getting the lion’s share.
Part of the reason is outperformance: 90% of AB’s assets under management outperformed their benchmark over the past five years, a track record that’s like catnip to investors large and small. AB’s fixed-income strategies did particularly well, accounting for the especially strong flows into the firm’s fixed income strategies in 2017.
But AB’s equity investments also did well this year, particularly in the fourth quarter, when its five-year outperformance rate rose to 91%. That helped AB beat estimates by a large margin in its latest quarter, and is attracting even more investors.
Investors may also be turning to AB because they think active managers can help mitigate some of the risks facing fixed income investors today. Active management, of course, costs more than passive management, and the high demand for AB services allowed the company to raise its average fee rate by 2.7% last year.
Here’s where things get a little quirky. AllianceBernstein has paid distributions every quarter since 1988, but the amount is variable, based on available cash flow. So the company doesn’t score particularly well on ourrating for consistency and predictability.
In addition, because AB is organized as a partnership, the distributions are considered return of capital, and the company issues a K-1 form instead of a 1099. That can be a turnoff for some investors.
So with all those caveats surrounding the distribution, what makes AB worth owning? First, there’s the 8.5% yield (based on AB’s total distribution of $2.30 over the past 12 months.) Then there’s the various catalysts for the stock to outperform over the next few years. As noted above, AB’s asset managers are delivering superior returns, attracting more investor dollars.
The latest earnings beat prompted a handful of analyst upgrades, and analysts now expect AB to deliver 12% EPS growth this year and 4% growth in 2019. Over the next five years, EPS growth is expected to average 12%.
Lastly, there’s the chart. Way back in 2007, AB hit an all-time high north of $90. But the stock fell over 80% during the financial crisis, and has been trading under $35 ever since.
But the stock recently bounced off its 200-day moving average and rebounded enthusiastically. A few weeks of decent support from the market looks like all AB needs now to really get going.
