Eaton Vance is an asset management firm based in Boston, Massachusetts and founded in 1924 with a $4.9 billion market cap. With offices in North America, Europe, Asia, and Australia, the company serves its clients by providing closed-end funds, mutual funds, term trusts, and ETFs (which trade under the NextShares name).
In late February, Eaton Vance reported (2/26/19) financial results for the first quarter of fiscal 2019. In the quarter, the company generated revenues of $406 million, which represents a decline of 3.3% over the same period a year ago.
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This revenue decline was partially due to declining assets, as consolidated assets under management (AUM) of $444.7 billion declined by 1% from the $449.2 billion of AUM reported in the same period a year ago.
The AUM decline reflected net inflows (notably rare among non-passive asset managers) of $11.7 billion and market price declines of $16.3 billion. The remainder of Eaton Vance’s decline in revenue is attributable to lower average management fees.
On the bottom line, Eaton Vance’s performance was similarly weak. Adjusted earnings-per-share of $0.73 declined by 6% from the $0.78 reported in the same period a year ago, and also decreased by 14% from the fourth quarter of fiscal 2018.
Revenue declines impacted earnings, and the company’s earnings also suffered from seasonal increases in compensation and benefit costs. With that said, Eaton Vance’s earnings release was in-line with analyst expectations as earnings-per-share came in just a penny under consensus estimates.
Eaton Vance’s competitive advantage lies in its appealing product offerings and low fees, which are allowing it to compete in an asset management industry experiencing significant fee compression. While most asset managers are experiencing net outflows due to the trend towards low-cost ETFs, Eaton Vance actually saw net inflows of $11.7 billion through the last four quarters.
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The asset management industry is not known for its recession resiliency. Stocks in this sector tend to perform poorly during bear markets as (1) equity markets fall, reducing asset managers’ revenue and (2) customers withdraw money, further lowering AUM. Still, Eaton Vance performed reasonably well during the last recession, as earnings-per-share declined by 31% and hit a new high within two years.
Eaton Vance is likely to generate earnings-per-share of ~$3.36 in fiscal 2019. Using this estimate, the company is trading at a price-to-earnings ratio of 12.5. Eaton Vance traded at an average price-to-earnings ratio of 16 over the last decade. If the company’s valuation can revert to a price-to-earnings ratio of 16 in 5 years, this will boost its returns by about 5.1% annually.
Eaton Vance is likely to generate 6% annualized earnings growth and pays a dividend that yields 3.3%. Overall, we believe that Eaton Vance could potentially deliver total returns of about 14.4% per year from current prices.
Ameriprise Financial operates in the financial sector. It is an asset manager, with a market capitalization of $18 billion, approximately 14,000 employees, and more than $800 billion in assets under management (AUM).
In late January (1/30/19) Ameriprise Financial released financial results for the fourth quarter and full year. Revenue was flat for the fourth quarter, but adjusted earnings-per-share (EPS) more than tripled year-over-year to $3.80.
Ameriprise Financial’s Advice & Wealth Management segment increased revenue by 5% while expenses dropped 2% in the fourth quarter. Higher net inflows helped lead to this growth. Revenue fell 13% for the Asset management division and fell 4% in the Annuities segment.
The Protection segment revenue increased 3% for the quarter. A tax rate of 16.9% (versus 35% in the fourth quarter of 2017) aided results. For the year, revenue grew 5.7% to $12.7 billion. Adjusted earnings-per-share grew 27% to $14.94, due in large part to a lower tax rate. Assets under management totaled $823 billion at the end of 2018.
Ameriprise Financial’s biggest competitive advantage is its brand strength within the asset management industry. Strong financial performance is critical to retaining and growing its assets under management. That said, Ameriprise Financial is not immune to recessions.
An economic downturn and resulting decline in the stock market would both be negative headwinds for AUM. This would naturally lead to declining earnings as well. Ameriprise’s earnings-per-share declined 13% from 2007-2009 during the Great Recession. Fortunately, the company snapped back in 2010 with 42% earnings growth.
Ameriprise would likely see its earnings decline during a recession but should remain profitable. Ameriprise’s dividend appears to be highly secure. Using expected EPS of $12.00 for 2018, Ameriprise is likely to have a dividend payout ratio of 30% for the year. This is a fairly low payout ratio that leaves plenty of room for Ameriprise’s high rate of dividend increases to continue.
Based on 2019 expected earnings-per-share of $15.30, Ameriprise stock currently trades for a price-to-earnings ratio of 8.6. This is below our fair value estimate, which is a price-to-earnings ratio of 12.5, equal to the average valuation multiple since 2009.
If Ameriprise stock experiences expansion of the price-to-earnings ratio to 12.5 over 5 years, shareholders would see a boost to the tune of 7.8% annually. In addition, shareholder returns will be supplemented by earnings growth and dividends. The combination of valuation changes, 8% expected EPS growth, and the 2.7% dividend yield fuels expected annual returns of 18.5% over the next five years.
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