Shares of Blackstone Group (BX -2.33%) have tumbled this year. The leading alternative asset manager has shed about 40% of its value. The stock recently fell back into the $80s, close to its 52-week low of $79.52 per share. That slumping stock price pushed Blackstone's dividend yield to 5.5%.
That looks like an enticing yield for a company with Blackstone's pedigree. Here's why now could be a good time to buy.
A growing disconnect between the stock price and the underlying business
Despite what the slumping stock price might suggest, Blackstone is having a great year. Assets under management (AUM) topped $950 billion in the third quarter, up 30% year over year. That has helped drive a 51% year-over-year increase in its fee-related earnings. Meanwhile, total distributable earnings have risen 36% year to date when factoring in the impact of performance revenues.
That has allowed Blackstone to pay out $4.94 per share in dividends over the last 12 months, up from $3.57 in the prior year. The company has also repurchased 8.1 million of its shares.
Meanwhile, the company's private investment funds have significantly outperformed public stock and bond markets. CEO Steve Schwarzman pointed out on the Q3 call:
The S&P 500 fell another 5%, bringing the year-to-date decline to 24%. The REIT index was down 10% in just a quarter and 28% year to date. The NASDAQ fell 32% year to date. And in debt markets, high-grade and high-yield bonds declined 14% to 15% in the first nine months of the year.
On the other hand, Blackstone's core+ real estate funds were up 2.3% in Q3, while its corporate private equity funds were only down 0.3%. Meanwhile, its private credit funds are up 9.3% over the past year. That outperformance is drawing investors to pour more money into Blackstone's funds.
Why the sell-off?
One reason Blackstone's stock has sold off is the belief that its growth will slow due to rising interest rates. That's because institutional and high net-worth investors have more options since rates on lower-risk government bonds are rising. That's giving them an alternative to Blackstone's yield-focused real estate and private credit investment funds.
For example, an analyst recently downgraded Blackstone's stock, believing it would see a deceleration in its retail platform. Driving that view is the increase in redemptions Blackstone has started to see at its non-traded real estate investment trust (REIT) and slowing growth in a retail-focused credit fund.
However, that seems unlikely. Instead, Morgan Stanley estimates that private markets AUM will grow at a 12% annual rate over the next five years. It expects investors to continue allocating capital away from the volatile public stock and bond markets to income-producing and inflation-protected alternative investments. That should benefit Blackstone.
Moreover, Morgan Stanley sees the greatest growth from individual investors, an area of focus for Blackstone. It sees high net-worth investors doubling their allocation to alternatives to 8% to 10% of their portfolios. That suggests Blackstone should be able to continue growing its AUM and fee-related income at attractive rates in the coming years.
Another factor weighing on Blackstone's stock is the concern that a recession could impact its investment returns. While downturns do bring challenges, they also open up opportunities. Blackstone is in an excellent position to capitalize on a weaker macroeconomic environment because it has $182 billion of dry powder in its funds to make new investments as compelling opportunities arise. Those investments could generate attractive returns for fund investors while generating growing performance revenue for Blackstone.
The market should eventually realize its mistake
The sell-off in Blackstone doesn't make a lot of sense. It's growing rapidly as more investors entrust it with their funds, driven by the continued volatility in the public markets and Blackstone's exceptional brand reputation. With the stock approaching its 52-week low, it could be about to bottom out again. That makes it look like a great buy for those seeking an attractive dividend yield and compelling upside potential.
