Shares of Brookfield Asset Management (BAM 1.85%) have slumped recently. They've fallen from their 52-week high of $64.10 down to the mid-$50s. That decline has driven its dividend yield up to around 3.2%, more than double the S&P 500's level of 1.2%.
Here's a look at whether Brookfield's dip below $60 a share is a buying opportunity or if investors should wait for an even bigger pullback.
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The current value proposition
Brookfield Asset Management has grown into one of the world's largest alternative investment managers with over $1 trillion in assets under management (AUM). That business generates robust and rapidly growing fee-related earnings. Over the past 12 months, Brookfield has generated $2.7 billion, or $1.65 per share, of fee-related earnings, an 18% increase. Meanwhile, its distributable earnings have increased 13% in the past year to $2.5 billion, or $1.56 per share.
With its shares currently around $55 apiece, Brookfield trades at about 35 times earnings. That's certainly not a bargain. The S&P 500 currently trades at more than 25 times earnings, while the tech-heavy Nasdaq-100 index fetches over 33 times earnings. However, asset managers typically trade at higher valuations due to their high profit margins, stable fee-based earnings, and steady growth.
NYSE: BAM
Key Data Points
Those characteristics allow most asset management firms to return the bulk of their earnings to investors via dividends and share repurchases. Brookfield currently pays out most of its distributable earnings in dividends, which is why it offers such an attractive yield.
A look at what's ahead
Brookfield has grown rapidly over the past few years. In 2020, it set a bold goal of doubling its fee-related capital and fee-related earnings by 2025. It exceeded those goals, growing both at a compound annual rate of more than 15% (above the 13% and 15% compound annual growth rates it initially anticipated).
The company has set a plan to double fee-related capital and earnings again by 2030 from current levels. Brookfield expects its fee-related capital base to increase from $563 billion to $1.2 trillion by 2030, representing a compound annual growth rate of more than 16%. This growth should drive fee-related earnings from $2.7 billion ($1.65 per share) to nearly $5.9 billion ($3.59 per share) by 2030, a 17% compound annual growth rate. Meanwhile, distributable earnings are on track to grow from $2.5 billion ($1.56 per share) to $5.9 billion ($3.62 per share) over the same period, an 18% compound annual growth rate.
Brookfield sees several factors driving this robust growth:
- Flagship funds: The company believes it can continue launching larger flagship funds. For example, it recently closed its second flagship energy transition fund, raising a record $20 billion from investors.
- Complementary products: Brookfield plans to continue launching new fund strategies, aiming to double the size of its complementary strategies by 2030. It recently launched a new private equity evergreen fund structure in Canada, one of several new products launched this year. The company is increasingly developing products geared toward individual investors, which it sees as a large, untapped market opportunity.
- Wealth solutions: Brookfield aims to triple fee-bearing capital from wealth solutions (from $97 billion to over $325 billion).
- Carried interest: Brookfield expects to realize additional earnings from carried interest (its share of excess fund profits above a minimum return threshold), which will boost its distributable earnings.
Additionally, Brookfield sees several potential upside catalysts that could drive even faster earnings growth. One notable driver is mergers and acquisitions (M&A). The company has already begun tapping into this growth accelerator. It recently agreed to acquire the remaining 26% of Oaktree that it didn't already own. The company has also recently completed its partnership with Angel Oak, increased its stake in Primary Wave from 9% to 44%, and participated in the Castlelake-led acquisition of Concora. Additional growth levers, such as M&A, support Brookfield's upside view that it can grow its distributable earnings by more than 20% annually over the next five years.
A compelling opportunity
Brookfield Asset Management's recent dip below $60 a share appears to present an attractive buying opportunity. While the company still trades at a premium valuation, its planned accelerated earnings growth supports it. With the company aiming to double its business by 2030, its stock price could also double in the next five years, making the current sub-$60 share price a potentially compelling entry point.
