This Investment Company Was Growing Even Before the Economy Was Improving

In an improving economic environment, there are two things that will definitely happen at some point. First, investors will begin to shift more of their savings into equities. This has been the trend for the last couple of years in the U.S., and there is good evidence that it's still happening. 

Also, interest rates will eventually rise (they can't get much lower), which is a good indicator that increases in the Fed's interest rates aren't too far away. One sector that benefits tremendously from both of these things is the investment services industry, and as Raymond James Financial (NYSE: RJF  ) is one of the more ambitious names in the space, it's worth a look.

How do these things help?
First, let's discuss briefly how these things help investment-related companies. As far as the shift to equities is concerned, this helps in terms of commissions as the shift is made (investors sell one type of investment, like a bond, then use the proceeds to buy stocks). It also increases the firm's assets under management because during good economic times, the markets increase. 

So, let's say a company has $20 billion in assets under management, and the markets rise by 10%. Without taking into account increased commissions as mentioned, the firm's assets will have risen to $22 billion, setting up higher future income. 

As far as interest rates go, companies will profit from their cash and money market investments. As rates rise, the spread (profit margin) between the rate at which a company must pay an account holder and the higher rate that a company can earn by putting deposits to work will widen. Even though cash investments drop during boom times, this can still be a positive impact on these companies' bottom lines.

Financial firms generally borrow at short-term rates and lend at long-term rates, and while we wouldn't think of an investment management company as a lender, consider how many people buy on margin, the interest rate of which generally changes over time. 

The benefit of rising rates can already be seen in the results of many of the big banks. Wells Fargo's (NYSE: WFC  ) recent quarterly earnings of $0.99 per share are an all-time record for the company, and the higher interest rates were part of the reason the company's return on equity rose to 13.9% from 12.7% for the year-ago period.

Who is Raymond James?
Raymond James Financial is involved in virtually all aspects of the securities business, with underwriting, distribution, trading, and brokerage operations. The company provides a range of investment management services to both private and institutional clients. 

One of the best reasons to love Raymond James is that the company is aggressively trying to grow its assets under management and its brand name through acquisitions and by seeking new clients. As far as acquisitions go, Raymond James made a very significant one last April, acquiring the Morgan Keegan investment management brand from Regions Financial (NYSE: RF  ) for $930 million, which added around $30 billion to the company's assets under management, bringing the total to about $405 billion.

This deal was a great one for both companies. It allowed Regions to focus on its core banking business while improving its financial health with the proceeds from the sale. It made Raymond James one of the largest independent wealth management firms in the U.S.

Over the last decade in general, Raymond James has done an excellent job of growing its revenue, and has recovered from the financial crisis and then some, with the last two years' annual revenue having topped even its best pre-crisis years.

Source: TD Ameritrade.

The Foolish bottom line
Raymond James is a good play on the benefits of the improving economy because it is one of the most ambitious companies in the sector in terms of growth plans, and it seems to be succeeding admirably. The Morgan Keegan acquisition will accelerate its growth, but bear in mind that the almost linear growth in the chart above was before the acquisition, and it just represents the organic growth of the company.

The combination of a shift to equities and the rise in interest rates will help the company continue on its path of consistent growth for years to come.

There are winning bets in the banking sector
Have you missed out on the massive gains in bank stocks over the past few years? There's good news: It's not too late. Bargains of a lifetime are still available, but you need to know where to look. The Motley Fool's new report "Finding the Next Bank Stock Home Run" will show you how and where to find these deals. It's completely free -- click here to get started.


Read/Post Comments (1) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2686268, ~/Articles/ArticleHandler.aspx, 11/25/2014 11:19:28 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement