Top Picks 2018: Morgan Stanley (MS)

01/01/2018 5:00 am EST

Focus: FINANCIALS

Stephen Biggar

Director, Product Strategy, Argus Research Corporation

Morgan Stanley (MS) is a diversified global financial securities firm. Its businesses include institutional securities sales and trading, investment banking, retail securities brokerage and institutional asset management, explains Stephen Biggar, analyst with Argus Research.

In our view, MS has made significant progress in lowering its risk profile, strengthening its capital buffers, and reducing earnings volatility.

In particular, the Wealth Management segment, which has a more stable revenue and profit profile, now accounts for nearly 50% of revenues, and risk-weighted assets continue to decline.

Results in this segment have also been helped by the company's focus on high- and ultra-high net worth clients, which are seeing the fastest growth.

We expect Morgan Stanley’s wealth management franchise to continue to benefit from improvement in the value of financial assets. Meanwhile, growth in compliance costs for Dodd-Frank and other measures has subsided, allowing for margin improvement.

A lighter regulatory environment should also allow for a focus on business-line expansion. Lastly, improving regulatory capital levels should lead to strong increases in the share buyback program and dividends.

In June 2017, Morgan Stanley announced that the Federal Reserve did not object to a 25% increase in the quarterly dividend, to $0.25 per share, beginning in the third quarter. The yield is about 2.0%. We believe that Morgan Stanley will have several more years of above-average dividend increases as capital levels improve.

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