BlackRock (BLK) is the largest asset manager in the world, with $4.525 trillion in total assets under management AUM and clients in more than 100 countries. The AUM generates Fee Revenues of around $5.5 billion a year. Product diversity and a heavier concentration in the institutional channel have traditionally provided BlackRock with a much “stickier” set of assets, or a propensity not to migrate to competitors, than its peers. BlackRock's well diversified product mix makes it neutral to shifts among asset classes and investment strategies, limiting the impact that market swings and/or withdrawals from individual asset classes or investment styles can have on its AUM. For example, BLK offers the iShare brand ETFs in Equity, Fixed Income, International and Multi-Asset allocations.
Many think BLK is mainly a retail-focused firm, but they offer specialized services for the following categories of customers:
- Investment Professionals Advisors and RIAs
- Asset Managers
- Fixed Income Professionals
- Broker Dealers
- ETF Investment Strategists
- Institutional Consultants
- Pensions, Foundations and Endowments
In its most recent investor’s presentation, the company offers an interesting breakdown of its client base:
The company outlines its philosophy on its website:
“BlackRock is the world’s largest asset manager, and our business is investing on behalf of our clients, from large institutions to the parents and grandparents, the doctors and teachers who entrust their savings to us.
We work only for our clients—period. Our promise is to offer them the clearest thinking about what to do with their money and the products and services they need to secure a better financial future.
That is why investors of all kinds entrust us with trillions of dollars, and it is why companies, institutions and global governments come to us for help meeting their biggest financial challenges.”
Retail investors represent only about 12% of assets but generate 35% of base fee revenues. iShares represent 23% of assets and also 35% of revenue, The bulk of assets and fees are generated in the instructional sector with 65% of assets and 30% of fees. As shown, growth in the retail segment will drive earnings higher over time. Management believes overall AUM can organically grow by 5% a year, driven by retail growth in the high single digits.
Retail asset expansion is slowing from its 5-yr average growth of 11%. iShares assets are expected to maintain its 5-yr average of 16% with mid-double digits growth projections. Institutional assets are expected to maintain its 5-yr average growth in the low single digits. The firm also sees growth potential in its BlackRock Solutions, which is a complete risk assessment and portfolio management service for institutional investors.
Earnings per share have been growing at a 15% annual rate since 2010 and have driven dividend growth of 19% over the same timeframe. Consensus EPS is for $18.50 in 2014, $20.60 in 2015 and $23.60 in 2016. At a PE of 15, or its EPS growth rate, share prices could reach $430.
At a constant 44% payout ratio, the dividend could grow to $10.50 from its current $7.72. However, if global markets do not return 6% to 7% annually and AUM growth falls below 5%, these estimates will be reduced.
Morningstar analysis offers the following observations:
Bulls Say: BlackRock is the largest asset manager in the world, with $4.525 trillion in total AUM and clients in more than 100 countries. Product diversity and a heavier concentration in the institutional channel have traditionally provided BlackRock with a much stickier set of assets than its peers. BlackRock's well diversified product mix makes it agnostic to shifts among asset classes and investment strategies, limiting the impact that market swings and/or withdrawals from individual asset classes or investment styles can have on its AUM.
Bears Say: The sheer size and scale of BlackRock's operations could end up being the biggest impediment to the firm's AUM growth longer term. Despite accounting for two thirds of total long-term AUM, institutional clients generate less than one third of BlackRock's long-term base fees given the lower fee structure attached to these large investment mandates. While actively managed funds account for just over one third of total long-term AUM, they account for more than half of long-term base fees, increasing the pressure on BlackRock to fix its active equity and fixed-income offerings.
In addition, Morningstar offers this recent opinion:
BlackRock's $15.2B purchase of iShares from Barclays at the depths of the financial crisis could go down as the financial services equivalent of the Yankees' purchase of Babe Ruth from the Red Sox, says ETF Trends, noting iShares now offers more than 700 ETFs and is closing in on $200B in AUM. The top three ETF providers (iShares, Vanguard, State Street) "have effectively maintained a triumvirate," says Morningstar, with 82% of the U.S. market and 70% of the global market - figures that aren't likely to change a lot in the near-to-medium term. "We expect iShares to continue to be the biggest growth driver for BlackRock in the near-to-medium term," says Morningstar, noting the unit in 2014 is expected to surpass last year's $62.2B in inflows (accounting for 56% of BlackRock's long-term flows).
Over the past 15 years, BLK has generated a 17.5% total annual return compared to the S&P 500 of a mere 4.3% return. Going forward, BLK has a realistic potential to generate 10% annual total return for long-term investors.
Although BLK has seen a huge run from its low of $308 just a few months ago to its current $356, the future looks bright for the firm. Investors seeking a top-quality financial firm should consider making an initial position here and add on weakness over the next few months.
BlackRock is followed by Guiding Mast Investments newsletter. Thanks for reading, George Fisher