Buying well-established businesses tends to work well for investors over the long haul. That is because such companies tend to dominate their industries, which fuels revenue and profit growth over time.
As the unquestioned leader among asset managers, BlackRock (BLK 0.69%) has been an excellent investment during the past 10 years. But should investors still buy the stock? Let's discuss BlackRock's fundamentals and valuation to tackle this question.
BlackRock is a well-oiled machine
With more than 40 million people invested in its iShares exchange-traded funds (ETFs), BlackRock is the largest asset manager in the world. This massive client base is what supports the company's leading $110 billion market capitalization.
| Metric | Q2 2022 | Q2 2023 |
|---|---|---|
| Average Assets Under Management | $9 trillion | $9.2 trillion |
| Net Margin | 24.8% | 31.3% |
Data source: BlackRock.
BlackRock's revenue decreased by 1.4% year over year to $4.5 billion in the second quarter ended June 30. Growth in the company's average assets under management (AUM) was more than neutralized by a decline in investment advisory fees. This was due to intense competition within the industry to win over customers.
BlackRock's non-GAAP (adjusted) diluted earnings per share (EPS) rocketed higher by 26% over the year-ago period to $9.28 for Q2. Measured cost management and growth in interest and dividend income helped the company's net margin to widen during the quarter. Along with a reduction in its share count in the period, this explains how BlackRock's adjusted-diluted EPS growth far exceeded revenue growth.
The company's future looks quite promising. This is because, first, BlackRock is consistently launching new ETFs to meet the needs of its clients: In 2022 alone, the company introduced more than 85 ETFs.
BlackRock's funds also have a reputation for tremendous performance, with 81% of its active AUM performing better than the peer median or benchmark during the past five years. This outperformance is likely the reason the company logged $190 billion in net inflows through the first half of 2023. Combined with an eventual bull market, BlackRock's adjusted-diluted EPS will grow by 9.8% annually during the next five years, according to analysts.
Image source: Getty Images.
The dividend isn't done growing
BlackRock's 2.8% dividend yield clocks in at almost double the S&P 500 index's 1.5% yield. And investors can be reasonably sure that the company's payout can continue to grow.
This assertion is supported by the fact that BlackRock's dividend-payout ratio is positioned to register at just under 57% in 2023. Given that the company's adjusted-diluted EPS will recover to roughly 2021 levels in 2024, the payout ratio should become much more manageable in 2024 and beyond. This should allow BlackRock's dividend growth to again accelerate after next year.
A buy for the next bull market
After gaining 23% in the past 12 months, shares of BlackRock aren't the clear bargain that they used to be. However, the stock could still be a buy, depending on an investor's objectives.
BlackRock's forward price-to-earnings (P/E) ratio of 18 is considerably more than the asset management industry average forward P/E ratio of 12.6. This is hardly an unreasonable valuation premium to pay for a company that's the best in its class.
If investors think the U.S. economy is bound to experience a worse-than-expected recession, they may be better off staying on the sidelines for a better entry valuation. But for investors seeking a mix of starting income and long-term capital appreciation, BlackRock stock could be a long-term buy and an even better buy amid an economic downturn.
