Franklin Resources (BEN) was founded in 1947 and named after Benjamin Franklin; today, its manages the Franklin and Templeton families of funds, notes dividend expert Ben Reynolds, editor of Sure Dividend.
Assets under management declined 12% in March to $580.2 billion, due primarily to the poor performance of the stock market. Competitive advantages are difficult to achieve in the asset management industry, but Franklin Resources has established itself with a long and successful track record of industry outperformance.
It has also increased its dividend every year since 1981, placing it on the list of Dividend Aristocrats. Franklin Resources is not a recession-resistant company. As a financial services provider, its profits are highly correlated to economic growth and market performance.
For example, Franklin Resources’ earnings-per-share declined 5.5% in 2008, and another 42% in 2009 during the Great Recession. That said, the company remained profitable, which allowed it to continue increasing its dividend throughout the recession, and earnings-per-share quickly recovered with 63% growth in 2010.
While industry conditions have tightened lately due to escalating competition, we believe Franklin Resources retains multiple catalysts for future growth. First, the U.S. is an aging population. As the population ages, along with increasing life expectancy, the need for retirement planning services will be higher than ever.
Franklin Resources will also be able to grow AUM through acquisitions, such as the recent $4.5 billion acquisition of Legg Mason (LM). Legg Mason, and its investment affiliates, collectively managed over $800 billion in assets as of January 31st, 2020.
The combined company will be among the world’s largest asset managers. The deal also presents significant cost synergies, as Franklin Resources expects to generate approximately $200 million in annual cost savings.
We expect earnings-per-share of $2.75 for 2020. Based on this, the stock trades for a price-to-earnings ratio (P/E) of 6.3, significantly below our fair value estimate of 11.
Expansion of the P/E multiple could increase annual returns by 11.8% through 2025. Combining valuation changes with 2.0% expected annual earnings growth and the 6.3% dividend yield, we expect total returns of 20.1% per year for Franklin Resources stock over the next five years.