M&A Activity Gives a Boost to Lazard

03/13/2019 5:00 am EST

Focus: FINANCIALS

Kuen (Scott) Chan

Editor, Investing Daily's Real World Investing

Lazard Ltd. (LAZ), is a financial advisory and asset management firm that operates in 27 countries globally; its services include mergers and acquisitions, restructuring, capital raising and structuring, shareholder advisory and various other financial matters, explains Scott Chan, editor of The Complete Investor.

Ironically, for Lazard’s financial services business, a bad economy may not be the worst thing. During rough times more companies have to restructure. On the other hand, when the economy is doing well more companies are likely to acquire smaller competitors. In that sense Lazard could see more demand when the economy is good or bad.

It is when the economy is mediocre — but not bad — for a sustained period and corporate activity is low that Lazard is more likely experiences a lull in demand. If the global economy does enter a slower growth phase, then Lazard’s financial services segment may be entering a tougher period.

Lazard’s asset-management business had about $215 billion in assets under management (AUM) at the end of 2018. The yearend total is a little misleading. We believe the average AUM during the year, $241 billion, is a little more reflective of the level of assets that Lazard manages.

That’s because Lazard’s management strategy heavily tilts toward equities (about 84% of AUM) and the stock market’s fall at the end of the year made an outsized dent in Lazard’s AUM. While we believe equities make the better long-term investment, December was simply a terrible month for the stock market.

Additionally, Lazard’s equity investment strategy carries a heavy international bent. At least 67% of its AUM is invested in non-U.S. equities. We believe that equities of companies in emerging economies have more growth runway ahead of them, but they also tend to be more volatile than their U.S. counterparts.

Still, despite the occasional rocky stock market, Lazard’s asset-management business is more stable than financial services and has grown to be nearly 50% of revenue. Lazard won’t be mistaken for a fast-growth stock. However, Lazard has also been consistently profitable, the exception being 2009 when the numbers across the finance industry were ugly.

In addition to its regular quarterly dividend, since 2015 Lazard has paid a special dividend once per year (in the range of $1 to $1.30) in the first quarter. This year, Lazard reduced the special dividend to $0.50.

However, part of the reason is that Lazard opted to use some cash to repurchase shares to take advantage of what it saw as an undervalued share price instead of paying out the cash as a special dividend. Net of the special dividend, Lazard’s core dividend has increased at an annualized rate of 12% over the past five years.

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