The S&P 500 Index has been in a downdraft, which materially increases uncertainty for long-term investors. However, weak markets can be a good time to start looking for dividend stocks, given that yield moves in the opposite direction to price. And one name that is particularly interesting today, given its tie to the broader markets, is Franklin Resources (BEN -0.37%), which is offering a fat 4.6% yield.
The big picture
Franklin Resources is an asset manager, with roughly $1.5 trillion in assets under management (AUM). It makes money by charging fees on that sum, bringing in around $1.65 billion in revenue from asset management fees in the first quarter of 2022 alone. Sales, distribution, and servicing fees rounded the top line out to roughly $2.1 billion. The company earned $0.68 per share in the quarter and paid a dividend of $0.29 per share, leading to a payout ratio of roughly 43%.
Notably, the company's earnings were down roughly 8% year over year in the first quarter, which leads to one of the big problems for investors today and why Franklin Resources stock is down 25% or so this year. The company makes money charging fees on the assets it manages, and the market is falling.
There's a double whammy here, as the value of the assets in the company's investment business falls and as investors pull money out of the company. Total AUM fell 1% year over year at quarter's end. Simply put, as the S&P 500 Index drops, investors get extra worried about a company like Franklin Resources.
And yet, despite this tie to the market, Franklin Resources has increased its dividend annually for more than four decades. Think about that for a second. Note that the streak started well before the turn of the century, meaning that the dividend grew through the dot.com bust, the housing crisis, and the coronavirus pandemic. This is a company that has proven its resilience.
Are things different this time?
That said, the big fear today is that the asset management business is shifting toward indexed products like exchange-traded funds (ETFs). That has meant reduced demand for active management, which is a specialty of Franklin Resources. It is a big issue to consider, but Franklin Resources isn't sitting still -- it is working to solidify its industry position by becoming a consolidator.
For example, in 2020 the company completed the acquisition of Legg Mason, another iconic name in the asset management business. Since that point, it has added smaller names O'Shaughnessy Asset Management, Lexington Partners, and Diamond Hill Capital Management.
This helps the company to continue expanding its business even in the face of industry headwinds, and it is helping Franklin Resources keep its business diversified. Today the company's AUM is spread over fixed income (40%), equities (35%), alternative assets (11%), and multi-asset portfolios (10%). Cash funds round the total out to 100%. Retail investors accounted for 52% of the cash the company manages, with institutional money at 46% and high net worth accounts comprising 2% of the total.
And while 75% of Franklin Resources' business is derived from the United States, 25% is from foreign investors. Basically, there's a fair bit of diversification in the business mix here.
While Franklin Resources isn't known as an ETF shop, it has been working to expand into this product type. For example, despite the overall AUM outflow in the first quarter, its ETF business, which includes both index product and actively managed fare, increased by $13 billion. Essentially, Franklin Resources is looking to adjust with the world around it so it can remain a long-term winner in the asset management space. Given its storied history, there's no reason to doubt that it can achieve this goal.
Buy when others are fearful
It is definitely not an easy time to buy Franklin Resources, despite its generous and well-covered dividend. However, the company has survived periods of market uncertainty before and should do so again. Maybe the market will sell off further, and buying this asset manager today will mean sitting with some paper losses while you wait for investor sentiment to improve.
Since nobody has a crystal ball, you can't rule that out, but collecting a fat 4.6% yield backed by a company that has achieved Dividend Aristocrat status should make being early easier to stomach. And don't forget that while every bull market has been followed by a bear, every bear has also been followed by a bull.