Brookfield Asset Management (BAM 2.31%) has been on a bit of a tear, surging over 40% in the past year. The company, part of several subsidiaries of the sprawling Brookfield ecosystem, deals in managing investments in alternative assets. It's a relatively new stock, created by a spinoff a few years back.
Investors may not yet fully appreciate the company's lucrative business model or the growth opportunities ahead. Here is what Brookfield offers, and why it's a fantastic buy at under $60 right now.
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The best business among the Brookfield companies?
Brookfield is one of the world's largest alternative investment companies, with over $1 trillion in assets under management (AUM). Brookfield Corporation is the parent company and owns stakes in numerous private and publicly traded subsidiaries.
The Brookfield Asset Management subsidiary plays a key role in this broader ecosystem. It creates private investment funds and other financial products and services that it sells to clients to raise capital. Then, the company invests that money on its clients' behalf into Brookfield (and elsewhere) assets, such as real estate, energy, infrastructure, private equity, and credit.
The best aspect of Brookfield Asset Management is that it doesn't directly operate the assets it invests in; it only manages the equity. For example, if the company buys a power plant, it's not responsible for its day-to-day operations or the expenses associated with that. However, it could sell the plant for a profit if its value increases.
Therefore, Brookfield Asset Management is a very asset-light and lucrative business. The fee revenue it generates is almost entirely profit. You could think of Brookfield Asset Management as a hedge fund that invests money in these alternative assets, rather than stocks.
A legendary dividend stock in the making
Growing, dividend-paying stocks can be lucrative investments when you buy and hold them for many years. Brookfield Asset Management hasn't been around long enough to have established a reputation, but the stock looks like a dividend monster in the making.
It currently yields nearly 3.2% at its current share price. Because it has virtually zero physical assets, the company pays out almost all the fee-based revenue it generates as dividends.
Brookfield Asset Management primarily grows by expanding its AUM, thereby increasing fee-based revenue. It does that by attracting new clients and capital. Management believes that the global asset opportunity for alternative investments will increase from $25 trillion today to over $60 trillion by 2032. Brookfield, with $1 trillion under management, is a prominent player, so this is a fragmented industry.
The company can grow by capturing market share, while the size of the pie expands simultaneously. Currently, Brookfield Asset Management projects that it will increase its fee-based revenue sufficiently to raise the dividend at a 15% annualized rate through 2029. That's impressive for a stock with a starting yield of 3.2%.
Should investors buy the stock under $60?
At first glance, Brookfield Asset Management looks pretty expensive at a price-to-earnings (P/E) ratio of 40. But consider the following. The company anticipates growing its profits at a mid-teens growth rate over the next four to five years. That's not a bad P/E for such high growth. Additionally, Brookfield Asset Management is a highly profitable, asset-light business, which also often supports a higher valuation.
All said, Brookfield Asset Management isn't dirt cheap by any means, but it's still a fair valuation for such an excellent company and emerging dividend growth star. Investors, especially those looking to hold the stock for the long term, can confidently buy the stock under $60 and feel good about what they're getting.
