Here's Why You Should Hold Franklin (BEN) in Your Portfolio
Franklin Resources, Inc. BEN enjoys diversification in flows across funds, vehicles and asset classes, as well as a first-mover advantage in various geographies. Strategic acquisitions have improved and expanded its alternative investments and multi-asset solutions platforms.Rising expenses may limit bottom-line growth, while high reliance on investment management fees for the bulk of its revenues makes it vulnerable to market fluctuations.
Franklin’s AUM saw a compounded annual growth rate (CAGR) of 23.3% over the last four fiscal years (ended fiscal 2022). While AUM declined in fiscal 2022 on a volatile landscape, in first-quarter fiscal 2023, the trend reversed, with the company witnessing a rising trend in AUM on the back of decent market performance. Also, the company’s efforts to diversify its business into asset classes that are seeing growing client demand, like alternative asset classes, will likely propel AUM growth and top-line expansion.
Franklin also holds organic growth prospects in several areas. The company’s relatively strong distribution platform has increased portfolio diversification. BEN has been an early entrant in many foreign markets, enjoying a first-mover advantage. Growth prospects bode well for the firm since it continues to diversify its business to muster broader sources of revenue.
In the past few years, Franklin has grown through acquisitions, thereby enhancing its foothold. In November 2022, the company closed the acquisition of Alcentra, one of the largest European alternative credit managers. In April 2022, the company completed the acquisition of Lexington, boosting its alternative asset offerings. These acquisitions will support the company in improving and expanding its alternative investments and multi-asset solutions platforms.
Franklin’s expenses witnessed a CAGR of 15.7% over the last four years (ended fiscal 2022). Though expenses declined in fiscal 2022, it recorded a rising year-over-year trend in first-quarter fiscal 2023. Going forward, any increase in variable expenses due to market uncertainties and investment in technology-related distribution opportunities will limit bottom-line growth.
Investment management fees are Franklin’s biggest source of revenues, comprising about 83% for first-quarter fiscal 2023 and depend on the level and relative mix of its AUM and the types of services provided. BEN’s AUM is exposed to market fluctuations, foreign-exchange translations, regulatory changes or a sudden slowdown in overall business activities. Such changes in AUM may hurt investment management fees and adversely impact Franklin’s financials. Notably, the company’s investment management fees have witnessed a volatile trend over the past years.
In April 2018, the company announced a repurchase authorization of up to 80 million shares. It repurchased 0.5 million shares for $14.2 million in first-quarter fiscal 2023. As of Dec 31, 2022, 23.9 million shares remained under the current authorization. Though Franklin’s capital deployment activities are commendable, its volatile earnings performance and an unfavorable debt/equity ratio compared with that of the broader industry reflect that the capital-deployment activities may not be sustainable in the future.
Over the past six months, shares of BEN have gained 16.1% compared with the industry’s 10.9% rise.
Image Source: Zacks Investment Research
The company currently carries a Zacks Rank #3 (Hold).
Stocks Worth a Look
A couple of better-ranked stocks from the finance space are Ameriprise Financial AMP and Ares Management ARES.
The Zacks Consensus Estimate for Ameriprise Financial’s current-year earnings has been unchanged over the past 30 days. Its shares have gained 15.4% in the past six months. Currently, AMP sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Ares Management currently carries a Zacks Rank #2 (Buy). Its earnings estimates for 2023 have been unchanged over the past 30 days. In the past six months, ARES shares have rallied 25.4%.
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