Federated Investors Inc. (FII) reported second-quarter 2013 earnings per share of 39 cents, lagging the Zacks Consensus Estimate by a penny. This also compares unfavorably with the prior-quarter earnings of 41 cents, though it came in line with the year-ago quarter.
Lower-than-expected results were driven by a decline in top line, aided by an increase in voluntary fee waivers. However, a rise in equity assets was the positive as the market improved, though at a slow pace. Moreover, decreased operating expenses reflect prudent expense management.
Net income for the quarter under review came in at $40.4 million compared with $43.0 million in the prior quarter and in line with the prior-year quarter.
Performance in Detail
Total revenue dipped 4% year over year and 2% sequentially to $223.8 million. The reported revenues were also below the Zacks Consensus Estimate of $250 million.
The year-over-year decline was due to an upsurge in voluntary fee waivers, partially offset by enhanced average fixed-income and equity assets. Moreover, the sequential decrease reflected a rise in voluntary fee waivers, partially mitigated by increased average assets.
During the reported quarter, Federated derived 40% of its revenues from money market assets, 59% from fluctuating assets (36% from equity assets and 23% from fixed-income assets) and the remaining 1% from other products and services.
Total operating expenses declined 3% on a year-over-year basis and 1% sequentially to $157.8 million in the quarter. The decline in expenses primarily reflects lower distribution costs and decreased intangible asset related expenses.
As of Jun 30, 2013, total AUM was $363.8 billion, up 2% from $355.9 billion as of Jun 30, 2012 but down 4% from $377.3 billion as of Mar 31, 2013. Average managed assets were $372.9 billion, up 3% from $360.6 billion in the prior-year quarter but down 2% from $381.2 billion in the prior quarter.
At quarter end, fixed-income assets improved 2% year over year but declined 4% on a sequential basis to record $50 billion. Equity assets came in at $38.7 billion, up 17% year over year and 2% sequentially.
Money market mutual fund assets came in at $268.5 billion, up 1% year over year but down 4% sequentially. Money market assets in both funds and separate accounts were $268.5 billion, up 1% year over year but down 4% sequentially.
As of Jun 30, 2013, cash and other investments were $302.9 million, up from $258.6 million as of Dec 31, 2012. Total long-term debt was $391.2 million, down from $405 million as of Dec 31, 2012.
Capital Deployment Update
In second-quarter 2013, Federated repurchased 158,133 shares of Federated class B common stock for $2.8 million.
Concurrent with the earnings release, the board of Federated declared an increased quarterly dividend of 25 cents per share, up 4% from the prior quarter. The increased dividend will be paid on Aug 15, 2013 to shareholders of record as of Aug 8, 2013.
We believe Federated has the potential for significant growth in the long run, given its fairly liquid balance sheet and a diversified asset as well as product mix. Moreover, investors’ increased demand for the company’s wide range of income-oriented products will aid top-line improvement. Further, capital deployment activities will augur well.
However, persistent regulatory pressures, slow global economic growth and a low-interest rate environment are expected to keep Federated’s earnings under pressure in the upcoming quarters.
Shares of Federated currently carry a Zacks Rank #3 (Hold). Among other investment managers, Franklin Resources Inc. (BEN) is scheduled to report earnings for the quarter ended Jun 30, 2013 on Jul 29. Waddell & Reed Financial, Inc. (WDR) will release on Jul 30 and Invesco Ltd. (IVZ) on Jul 31.
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