Investors should pay attention to a stock that benefits from normal market growth, plus new growth by attracting additional investments, with a dividend yield almost double the S&P, and a P/E almost 13% lower than the market, suggests Douglas Gerlach, editor of Investor Advisory Service.
A stock combining these characteristics ought to outperform the S&P over time. BlackRock (BLK) is the world leader in ETFs through its iShares brand. Beyond index funds, BlackRock is a broad-based investment manager.
About 56% of its $6.1 trillion in long-term assets under management (AUM) consists of equities. Another 33% are in fixed income, 8% in balanced funds, and 3% in alternative investments. It also manages $455 million in cash management products.
BlackRock also offers a technology platform called Aladdin which provides wealth managers and custodians with data and tools to develop fund portfolios for clients. Technology revenue is 6% of total company revenue, but also helps place client assets in BlackRock products.
BlackRock’s scale gives it impressive cash flow. Free cash flow is approximately 30% of BlackRock’s revenue. BlackRock uses its free cash flow to pay dividends (a 3.0% yield), acquire other investment management firms, and buy back stock.
We believe that BlackRock can maintain double-digit EPS growth with 3%-5% net cash inflows, and 5%-7% market growth between stocks and bonds. Profit margins have gradually expanded, and this should continue.
BlackRock should also experience an EPS boost from share buybacks if it doesn’t find something even more profitable to do with its free cash flow, such as acquisitions. We believe it can grow EPS by 10% annually.
Five years of 10% growth could result in EPS of $42. A repeat of the average high P/E ratio of 21.0 may lead to a stock price as high as $884. Adding in dividends, the total return could be 17% per year. The downside risk appears to be 17% to $361, its 52-week low.
