BlackRock (BLK) grew its earnings per share by 17% in 2017; management then outdid themselves during the trailing 12 months, posting 18% bottom-line growth in 2018, asserts Jim Pearce, editor of Personal Finance.
During this same 12-month period, the stock price fell from a high of more than $560 to roughly $400. The negative price action, alongside rising earnings, has turned this name from a growth stock into a value stock (with growth characteristics).
BlackRock was trading for nearly 25x earnings at the start of 2018 and at the start of 2019, BLK shares are trading for a mere 14x earnings.
This 14x EPS multiple represents the cheapest valuation that BlackRock shares have seen since 2012. In 2011, BlackRock hit its lowest earnings multiple in the past two decades when it traded at just a tad below 13x EPS. In 2009, at the trough of the Great Recession the shares traded for roughly 15x EPS.
There are changes going on in the asset management industry that represent headwinds for BlackRock at the moment, but frankly put, I have a hard time believing that the market conditions that this company is facing today justify an earnings multiple lower than the one it saw during the worst financial crisis we’ve seen in a generation.
Analysts and institutional investors alike are spooked by the apparent race to the bottom in the asset management industry when it comes to the fees associated with electronically traded funds (ETFs).
ETFs have been all the rage in recent years, offering investors an incredibly cheap and simple way to diversify their portfolio. BlackRock continues to be the global leader in this space and I continue to believe that the size and scale of its operations will allow it to ultimately win with regard to these pricing wars.
We’ve seen the asset management space consolidate in recent years and I expect this trend to continue. Growth will likely slow for BlackRock in 2019. It could slow in a big way (currently, analysts are expecting BlackRock’s EPS growth to be flat). I’m not surprised that investors with an eye on the short-term would be disappointed by such rapidly slowing growth.
Going from nearly 20% annual growth to 0% is a significant drop. However, investors with longer-term horizons should step back and realize that this company has been profit printing machine. Over the last decade alone, BlackRock has increased its EPS from $6.45/share to more than $27/share.
I’m willing to forgive BlackRock management for an off year every now and then and give them the benefit of the doubt when it comes to their long-term trajectory when I see the past results they’ve generated.
Furthermore, I’m quite happy to hold my BLK shares, even at a loss, because not only does this company pay a safe, 3.2% yield at the moment, but it has also provided investors with near unmatchable dividend growth.
Since it began paying a dividend in 2003, BlackRock’s dividend growth CAGR (compound annual growth rate) has been more than 25%. The company’s dividend growth has slowed a bit in recent years. In 2018, BlackRock provided investors with a 9% dividend increase. BlackRock’s EPS payout ratio remains low, at 45%, and I expect another high single digit/low double-digit increase in 2019.
