Asset management is a lucrative business model, regardless of the economic environment. That's because managing other people's money isn't accompanied by merchandise costs, and the overhead costs are reasonably low.

BlackRock (BLK 1.41%) stands out in a crowded field of asset managers as the largest player in the industry. But is the stock a buy for investors seeking significant passive income? Let's dig into BlackRock's fundamentals and valuation to address this question.

Huge amounts of assets are flowing into the company's funds

Employing nearly 20,000 people as of last December, BlackRock has come a long way since its humble beginnings in 1988 with eight people in a single room. The company's $9.1 trillion in assets under management (AUM) as of March 31 positions it as $1 trillion larger than its next-biggest competitor, Vanguard.

BlackRock's revenue fell 9.7% from the year-ago period, to $4.2 billion, during the first quarter ended March 31. This was primarily driven by an 8% year-over-year drop in average AUM to $8.9 trillion for the quarter, which resulted from the downturn in financial markets. In addition, poor market performance generated lower performance fees.

Q1 2023 Adjusted Net Margin Q1 2022 Adjusted Net Margin
28.3%  31.1%

Data source: BlackRock Q1 2023 earnings press release. 

BlackRock's non-GAAP (adjusted) diluted earnings per share (EPS) dipped 16.7% versus the year-ago period, to $7.93 in the first quarter. However, the asset manager couldn't reduce its expenses enough to offset lower sales, and as a result, saw net margin shrink. On a per-share basis, a 1.4% decline in BlackRock's weighted-average diluted share count wasn't a sufficient cushion against lower profitability either. Both factors, as a result, contributed to EPS declining faster than revenue.

The last 12 months have obviously been rough for BlackRock. But there is plenty of hope for a recovery on the horizon. Despite lower revenue, BlackRock's reputation as the top asset manager still led $110 billion of net inflows into the company's funds during the first quarter. As a higher interest rate regime takes over, BlackRock's fixed income franchise pulled in as much as 49% of those inflows through various products, most notably via ETFs. While financial markets should eventually recover as they always do, BlackRock has positioned itself to take advantage of any market situation to eventually emerge stronger, thanks to its scale and reach. This is why analysts project an average annual EPS growth of 6.9% for the next five years.

A businessperson works on a laptop.

Image source: Getty Images.

A market-topping dividend with room to grow

Income investors will find BlackRock's 2.9% dividend yield attractive since it is meaningfully higher than the S&P 500 index's 1.7% yield. And the payout appears to be sustainable.

BlackRock's dividend payout ratio is projected to be approximately 57% for 2023. This is admittedly a payout ratio on the high end for asset managers. But it is important to remember that 2023 is expected to be a trough year for earnings.

For illustration, the dividend payout ratio could improve drastically to just under 50% in 2024 based on the current analyst-adjusted diluted EPS consensus and the current annualized dividend per share of $20. So I believe the next dividend increase will also be modest before returning to high-single-digit annual payout growth.

The stock's valuation could have more downside

BlackRock's shares have traded flat over the last year, but have outperformed broader benchmark indices such as the Financial Select Sector SPDR Fund and the S&P 500. However, the stock's current valuation does justify some caution going forward.

BlackRock's 12-month forward price-to-earnings (P/E) ratio of 17.5 is far above the asset management industry average forward P/E ratio of 11.8. This alone isn't alarming to me considering the company's superior quality compared to its peers.

But the risk facing the broader industry that can't be ignored is that the current valuation may be discounting how severe a looming recession could prove to be. That is why I would advise holding off buying BlackRock stock (for now) and paying close attention to where the economy is headed.