For about as long as there have been assets, they have been managed by someone. In fact, the history of asset management dates back 2 1/2 millennia to ancient Greece.
The industry has adapted to technological advancements over that time, and will likely always be around in some capacity. And as the most dominant asset manager in the world, BlackRock (BLK -0.50%) is arguably a must-own stock for dividend growth investors.
But with the stock up about 50% from its 52-week low of $503, is BlackRock still a buy? Let's dive into the company's fundamentals and valuation to try to decide.
BlackRock is absorbing cash from investors
BlackRock generated $17.9 billion in revenue in 2022, which was 7.7% lower than the year-ago period. What was behind BlackRock this dip in revenue?
Because of the decline in markets, BlackRock's average assets under management (AUM) fell 4.4% year over year to $8.9 trillion in 2022. The decline in AUM, resulting in lower performance fees, explains the drop in revenue.
But last year wasn't all bad news for Blackrock. The same persistent inflation and surging interest rates that contributed to the stock market downturn last year also made fixed-income products more attractive. Much of the company's $393 billion in long-term net inflows during the year went into its bond exchange-traded funds. This is how BlackRock's AUM held up relatively well despite the sharp stock market sell-off in 2022.
The asset manager's non-GAAP (adjusted) diluted earnings per share (EPS) fell 12.7% from a year earlier to $35.36. Because BlackRock's total expenses declined at a slower rate than revenue (3.7%), this weighed on profitability. That explains how the company's non-GAAP net margin contracted 210 basis points (2.1%) year over year to 30.2% in 2022. Reduced profitability couldn't be offset by a 1.3% lower share count, which is why BlackRock's fall in adjusted diluted EPS was more pronounced than the fall in revenue.
As financial markets eventually recover, so too will the company's AUM, revenue, and adjusted diluted EPS. Thus, analysts anticipate that BlackRock's adjusted diluted EPS will grow 6.1% annually over the next five years.
Image source: Getty Images.
A dividend that can withstand a recession
Compared to the S&P 500 index's 1.7% dividend yield, BlackRock's 2.6% yield is compelling. And the dividend arguably should be able to withstand most recessions.
This is because even with a mild recession all but baked into analysts' expectations for 2023, the dividend is well-covered.The company just raised its quarterly dividend to $5 per share, which translates to a 57% dividend payout ratio based on analysts' estimates of just under $35 earnings per share this year. Even if 2023 brings about a recession more severe than predicted by most economists, this should be sufficient breathing room for BlackRock to maintain its payout.
The margin of safety may not be enough
BlackRock is well-positioned to eventually move past the current bear market in equities. But the valuation, especially after the recent share price gains, already seems to mostly reflect this thesis.
BlackRock's trailing-12-month (TTM) price-to-sales (P/S) ratio of 6.2 is significantly higher than its 10-year median of 5.3. This leaves little room for upside if the world does avoid a recession. And at the same time, potential downside could be magnified if a worse-than-expected recession does materialize. That's why investors may want to refrain from adding to BlackRock for now.
