Financial markets tend to loathe uncertainty. And with rising inflation, further interest rate hikes in the future, and talks of a potentially mild recession, there is plenty of uncertainty right now. This goes a long way to explain why the S&P 500 index has tumbled 13% year-to-date.
Because the stock market is a vast collection of stocks, some have fared even worse than the broader market. Asset manager BlackRock (BLK 0.68%) has been clobbered and its stock price is down more than 31% so far this year.
But the company's performance suggests the sell-off in the blue-chip dividend grower has been greatly overdone. Here are three reasons why BlackRock is a convincing buy for income investors.
1. BlackRock consistently tops the analyst consensus
In its first-quarter earnings report for the period ended March 31, BlackRock had mixed earnings results. The New York-based asset manager recorded $4.7 billion in net revenue during the quarter, which works out to a 6.8% growth rate over the year-ago period. This narrowly missed the analyst consensus of $4.8 billion for the first quarter. But this is more the result of high expectations from analysts since BlackRock has surpassed the average analyst estimate in eight out of the last 10 quarters.
The company's status as the leading asset manager helped it offset the headwind of volatile equity markets in the first quarter. BlackRock's average assets under management (AUM) balance surged 10.1% higher year over year to $9.7 trillion, which was partially due to $114 billion in net inflows into the company's products during the quarter. The significantly higher average AUM balance also more than canceled out the dip in performance fees collected by BlackRock.
BlackRock posted $9.52 in non-GAAP (adjusted) diluted earnings per share (EPS) in the first quarter, which is equivalent to an 18.4% growth rate over the year-ago period. BlackRock handily beat the average analyst prediction of $9.18 in adjusted diluted EPS for the quarter. So, how did the stock post its 10th adjusted diluted EPS earnings beat in the last 10 quarters?
BlackRock was able to leverage its size and scale as an asset manager once again in the first quarter. As average AUM grows and the need for employees and other expenses to manage those funds lag behind, BlackRock is able to steadily improve its profitability. This describes how the company's non-GAAP net margin expanded 290 basis points year over year to 31.1% in the first quarter. Along with BlackRock's higher net revenue base and increased net margin, the stock reduced its outstanding share count by 0.5% in the first quarter.
Thanks to BlackRock's winning business model and the expectation of a steadily rising market over time, analysts are anticipating 7.3% annual earnings growth through the next five years.
2. High dividend growth can continue
BlackRock just hiked its quarterly dividend by 18.2% in January. While I don't envision this high rate of growth persisting, low-double-digit percentage annual dividend growth should keep up over the medium term.
This is because BlackRock's dividend payout ratio is expected to be 49.4% in 2022. This reasonable ratio allows the company to retain enough capital to repay its debt, complete acquisitions, and execute share repurchases to drive its adjusted diluted EPS higher over time.
BlackRock's dividend growth prospects are especially encouraging for a stock that offers income investors a market-beating 3.1% yield right now because the stock price has been so depressed at the moment.
3. A world-class stock at a below-average valuation
BlackRock is a fundamentally healthy business. And it appears that the stock is a downright bargain at its current valuation.
That's because BlackRock's forward price-to-earnings (P/E) ratio of 16.1 is lower than the S&P 500's 17.7 forward P/E ratio. Simply put, one of the best stocks in the world is trading cheaper than the average of S&P 500 stocks.
And if that wasn't enough, BlackRock's trailing-12-month dividend yield of 2.7% is moderately higher than its 10-year median of 2.4%. For a stock with fundamentals that remain intact, this suggests BlackRock is trading at a moderate discount.