With the conflict in Ukraine, continuing pandemic concerns, elevated inflation, and the prospects of a global recession weighing on investors' minds, major market indices have tumbled in 2022. The S&P 500 index has fallen 18.8% so far this year.
Arguably no industry has been hit harder in the near term by the current bear market than the asset management industry. But BlackRock (BLK +0.00%), the king of the industry, looks positioned to come out of the market downturn stronger than ever. Let's take a look at the company's fundamentals and valuation to unpack why it could be a great pick for income investors over the long run.
NYSE: BLK
Key Data Points
Net inflows into BlackRock's funds during a bear market
With just under $8 trillion in assets under management (AUM) as of Sept. 30, BlackRock is the most dominant asset manager in the industry. The company offers a variety of products to retail investors (i.e. non-professional investors) and institutional investors (e.g. pension funds and insurance companies). These include more than 1,000 exchange-traded funds (ETFs) that comprised $2.6 trillion of total AUM via its iShares brand, as well as countless passive and actively managed funds for institutional investors worth $3.8 trillion as of the end of the third quarter.
BlackRock's total revenue declined 14.6% year over year in the third quarter to $4.3 billion. An 11.5% drop in the company's average AUM to just under $8.5 trillion during the quarter translated into less investment advisory fees. Along with a 76.2% year-over-year plummet in performance fees to just $82 million, this accounts for BlackRock's double-digit decline in total revenue.
The company reported $9.55 in non-GAAP (adjusted) diluted earnings per share (EPS) for the third quarter. Putting this into perspective, this was down 15.8% over the year-ago period. BlackRock's 10.6% reduction in expenses wasn't enough to neutralize its lower revenue. This is why the company's net margin fell 100 basis points year over year to 33.7%. BlackRock retired 1.5% of its share count over the year-ago period, which partially offset its reduced profitability.
At a glance, the asset manager had a tough quarter. That being said, there's certainly reason for optimism beyond the next few quarters: Despite the market crash, BlackRock recorded $17 billion in net capital inflows in the third quarter. This was much better than the Dividend Aristocrat T. Rowe Price's (TROW +0.73%) net client outflows of $24.6 billion during the same period. As equity markets eventually recover, this suggests that BlackRock isn't far off of from once again surpassing $10 trillion in AUM as it did in 2021.
That's why analysts believe that BlackRock will surpass $40 in full-year adjusted diluted EPS as soon as 2024. This would be slightly higher than its record of $39.18 set in 2021.
Image source: Getty Images.
The dividend is amply covered for near-trough earnings
BlackRock's 3% dividend yield provides nice starting income compared to the S&P 500 index's 1.7% yield. And as difficult as the environment has been for the company, its dividend still seems to be safe.
This is because BlackRock's dividend payout ratio will be around 57% in 2022. Because asset managers have light capital expenditure requirements to maintain their businesses, this is a decent payout ratio. But I believe management will aim to bring it back down a bit as financial markets eventually rebound. Thus, BlackRock's dividend growth will be minimal in the next year or two, but the starting yield already compensates for this fact.
A fair entry point for the long haul
Just as BlackRock endured the Great Recession more than a decade ago, the company is poised to make it through this tough environment as well. And the stock is sensibly valued at the current $649 share price.
BlackRock's trailing-12-month (TTM) price-to-sales (P/S) ratio of 5.3 is the same as its 10-year median TTM P/S ratio of 5.3. This makes the stock a solid pick for income investors.
