Investing is ultimately about balancing trade-offs. Investors trade growth for reliability. Sometimes they'll sacrifice income right now for long-term growth potential. They'll even swap out entire categories of investments for another, in order to reduce risk, or perhaps take on more of it. And most of the time, the risk/reward profile of an investment prospect is clear, and appropriately priced in.
There is the occasional oddball, however, that's arguably mispriced thanks to the market's misunderstanding of the actual risk being imposed. Artisan Partners Asset Management (APAM) is one such name. Its dividend yield of 7.3% is well above the S&P 500's (^GSPC) present yield of 1.3%. While such a frothy dividend yield would imply some risk of implosion, its corresponding payout is actually something you can trust to persist in the future.
Image source: Getty Images.
Artisan who?
If the name rings a bell but you can't quite figure out why, this will help -- Artisan Partners is a mutual fund company. It's just not a very big one, which is why it's remained off so many investors' radars. The outfit manages 16 different funds, with roughly $174 billion worth of assets under management (AUM).
That's a lot money to manage, but it's only a fraction of the amount being steered by the likes of fund management names Vanguard or Fidelity. The former is overseeing about $7 trillion worth of investors' money, while the latter boasts more than $4 trillion in AUM.
Don't let its smaller size fool you, though. The mutual fund business isn't one where smaller players necessarily struggle to compete with bigger industry powerhouses. In fact, it's arguable that smaller, boutique-type asset managers have something of an edge on bigger competitors, in that they're able to adapt more quickly and employ more aggressive stock-picking strategies. Indeed, a great deal of Artisan's historical growth stems from "a combination of original thinking and a disciplined approach."
In other words, fund investors care more about their personal performance than a particular pedigree. Many of these investors also like fund options that are outside of the market's most obvious, mainstream choices.
The proof is in the pudding
To this end, Artisan's historical results confirm that what the company does is working for its fund investors. By extension, it's working for the company's shareholders.
Take a look at the graphic below, comparing the fund manager's revenue, net income, per-share earnings, and dividend per share. Sales and profits ebb and flow, but they ebb and flow very little from one quarter to the next. Analysts project this ebb and flow to remain net-bullish through the end of 2022, as it has been for the past several years. Most importantly, however, each quarter's dividend since the latter part of 2017 has been more than covered by earnings.
Data source: Thomson Reuters and Artisan Partners. Chart by author.
Then there's the dividend data you're not seeing. In addition to these ordinary dividends paid out every quarter since 2013 -- totaling up to $21.73 per share -- Artisan Partners has also dished out another $6.07 worth of special dividend payments per share.
The secret of Artisan's success
If you're wondering how a stock market-related business can remain so consistent and so profitable when the market itself has been so volatile during the timeframe in question, it all has to do with the way mutual fund companies make money.
Sure, the price paid to purchase a mutual fund can sometimes be high. Some of these so-called loads can even exceed 5% of the initial investment cost, and even though plenty of no-load funds are readily available, plenty of high-commission load funds continue to be offered, and bought!
That's not really the end-goal for most mutual funds these days, though. In fact, Artisan doesn't even charge upfront fees to purchase its funds. Rather, the real point and purpose of the mutual fund business these days is getting investors into a fund and keeping them there, and then charging a management fee year in and year out.
This fee is usually nominal. The Artisan Value Fund (ARTLX), for instance, only collects an annual fee of about 1% of the money invested in the fund, and that payment is removed automatically. The fund's owners don't even see it taken out unless they're scrutinizing their correspondence with the company and looking for the "expense ratio" data.
Here's the thing: This management fee is collected regardless of how well the fund is performing at the time, and this fee is collected over and over and over again as long as an investor continues to hold onto the fund. This sets the stage for reliable revenue that's easily converted into reliable earnings. The key for Artisan and any other fund company is simply making sure they don't severely underperform.
A solid dividend name, but only a dividend name
The trade-off is that there's not a lot of growth opportunity here. The mutual fund business is very competitive, meaning most of Artisan's growth will stem from market growth and not necessarily from market share gains.
What Artisan Partners Asset Management lacks in raw growth prospects, however, it more than makes up for with a big dividend yield and a business model that readily supports sustained payments of it. It may be one of the market's best-kept dividend-paying secrets, in fact, made even more compelling by its current price that's less than 10 times next year's per-share earnings estimate.
