A Contrarian Outlook on Asset Managers

04/19/2019 5:00 am EST

Focus: FINANCIALS

Brett Owens

Chief Investment Strategist, BNK Invest, Inc.

Brett Owens is a leading on income investing; the editor of the industry-leading Contrarian Outlook often finds value and long-term opportunity among stocks and funds that others may miss. Here's he looks at two under-the-radar asset management firms.

Lazard (LAZ) is a high yielder that many investors tend to ignore because of its boring business and a name that mostly goes unknown to the consumer class.

Lazard is an asset management company — and not a particularly large one at that, at $4.3 billion in market cap — that offers mutual funds, advises on mergers & acquisitions and more. It shares a marketplace with the likes of Goldman Sachs (GS), UBS (UBS) and AllianceBernstein (AB), which is part of why it’s so difficult for it to find the spotlight.

Let’s consider that so far in 2019, JPMorgan Chase (JPM) is the top M&A advisory at $182 billion in transaction value across 25 deals. Lazard is 22nd at $10.8 billion across just nine deals.

Lazard has been a laggard over the past decade, gaining only about 3% on a total-return basis (without its generous yield, that’s a 23% loss!) That said, the company has produced roughly 23% growth in both revenues and profits during that time, and the stock is underpriced less than 9 times forward estimates.

Lazard also is a “sneaky” high-yield dividend stock. LAZ’s headline yield of 4.7% is nothing to sneeze at, nor is its 11-year streak of dividend hikes.

But Lazard also pays out a special dividend based on the company’s profits, and has done so for seven straight years. It’s a policy I love because it demonstrates responsible fiscal management, plus it’s a nice kicker to an already attractive yield. When you throw in this year’s 50-cent special dividend, that translates into a substantial 6% yield.

Moelis & Co. (MC) is another high-yielding asset management company a la Lazard. It provides financial analysis, helps raise capital and advises on deals. With a 2.5 billion market cap it’s even smaller and less noticed than Lazard. Looking back at that same list of M&A advisers, Moelis is 26th at $5.8 billion in transaction across 11 deals.

But the company is growing like a weed, including 2018 revenues of $886 million (up from $552 million in 2015) and free cash flow of $384 million (up from $139 million). You’re paying a bit more than underpriced LAZ, at under 14 times forward estimate, but you’re getting a company that appears to have more upside potential.

Moelis is also like Lazard in that it pays special dividends — and again, it tends to be more supercharged than its peer. It pays about 4.6% in yield based on its regular dividend of 50 cents per share — itself a massive 150% improvement from 2015 levels. But MC also pays out special dividends, sometimes twice a year.

Over the past 12 months, Moelis has paid out two special dividends of $1.25 and $1.50 per share. When you add up all its payouts over the trailing 12 months, the stock has delivered a stunningly high yield of nearly 11%.

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