Templeton Funds Boost Franklin Resources

09/07/2018 5:00 am EST

Focus: FINANCIALS

Ben Reynolds

CEO, Sure Dividends

Franklin Resources (BEN) is a global investment management organization. The company’s primary offering is its suite of mutual funds and ETFs under the Franklin Templeton name, asserts Ben Reynolds, income expert and editor of Sure Dividend.

Franklin Resources was founded in 1947, has offices in 33 countries, and trades with a market capitalization of $17.9 billion.

In late July, Franklin Resources reported third-quarter financial results. Operating revenue declined by 3% and net income declined by 2%. The company grew earnings-per-share 3% thanks to share repurchases. Franklin Resources’ poor fundamental performance was driven by a decline in assets under management (AUM).

The company’s total assets under management were $724.1 billion as of June 30, 2018, down $13.4 billion. Franklin Resources’ stock fell by as much as 10% following the earnings release.

In early August, Franklin Resources announced (8/8/18) month-end assets under management. As of July 31st, the company’s AUM was $733.7 billion, which increased by 1.3% month-over-month.

The asset management industry is highly competitive. Underperforming funds can cause investors to sell, even though performance is measured over irrationally short time periods. Still, Franklin Resources does have competitive strength thanks to the Franklin Templeton brand.

Franklin Resources’ earnings-per-share declined by 45% during the worst of the Great Recession. The combination of declining asset values and fund outflows serves to significantly reduce the company’s earnings during recessions. The company returned to new earnings-per-share highs by 2011.

Franklin Resources reduced its share count by 2.8% per year over the last decade. Earnings-per-share grew by 2.4% per year over the same time period. Share repurchases accounted for all of the company’s growth over the last decade, and then some.

Growth should pick up with the launch of a host of country-specific ETFs as well as the acquisition of U.K.-based Edinburgh Partners. We expect earnings-per-share growth of 6% over full economic cycles.

Franklin Resources is expected to generate earnings-per-share of about $3.40 in fiscal 2018. The company is trading at a price-to-earnings ratio of 9.5 using this estimate. The company’s historical average price-to-earnings ratio is 14.5. Franklin Resources is significantly undervalued today.

We believe that Franklin Resources should easily deliver double-digit total returns for today’s investors through earnings growth (~6%), dividend payments (2.8%), and meaningful valuation expansion.

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