We are initiating coverage on Raymond James Financial Inc. (RJF) with a ‘Neutral’ recommendation. We anticipate synergies from its recent acquisition of Morgan Keegan. Moreover, the company’s capital strength and consequent capital deployment through dividend as well as share repurchase activities should make its stock attractive to yield-seeking investors. Nevertheless, the ever-increasing non-interest expenses along with low interest rates and sluggish economic recovery are expected to act as headwinds to its financials.
Along with its subsidiaries, Raymond James provides financial services that include underwriting, distribution, trading and brokerage of equity and debt securities and the sale of mutual funds and other investment products, mainly in the U.S. and Canada. Apart from these, the company also offers investment management services, corporate and retail banking and trust services.
Given the acquisition and investment opportunities amidst the protracted economic recovery, Raymond James is focusing on inorganic growth. In April, the company completed the all-cash acquisition of Morgan Keegan and MK Holding from Regions Financial Corp. (RF). Moreover, in 2011, the company had acquired Howe Barnes, which led to the expansion of Private Client Group segment. Going forward, Raymond James is expected to pursue more acquisitions that will enhance its market share and top line.
Moreover, Raymond James is a good asset for yield-seeking investors. The company has a track record of continually raising dividend over the last decade. Additionally, it is actively repurchasing its common stock. Given a stable capital position, we anticipate the company to continue with its capital deployment activities going forward.
On the flip side, Raymond James continues to face headwinds due to the increasing operating expenses. Non-interest expenses continuously increased over the last two fiscal years – 12.5% in 2011 and 10.8% in 2010 – and reached $2.88 billion in 2011. Rising compensation cost was one of the primary reasons for the swelling expenses. As a result of the acquisitions, expenses are expected to increase further, thus pressurizing the bottom line.
Additionally, Raymond James is yet to successfully diversify its footprint. A major portion (almost 88%) of the company’s revenue comes from its U.S. operations. Though it has operations in Canada and a few other countries, these are comparatively lower than that of the U.S. Consequently, the sluggish economic recovery and the low interest-rate environment in the U.S. could impact its financials going forward.
Raymond James currently retains its Zacks #3 Rank, which translates into a short-term Hold rating.
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