In many people's eyes, Goldman Sachs (NYSE:GS) has been more intimately linked to the health of Wall Street than any of its big-bank peers, with the investment bank rising and falling alongside the level of interest among institutional investors in the financial markets. For several years, Goldman has endured less than stellar conditions on Wall Street, and increased regulation has led many institutions to back away from the business lines Goldman has long used as a primary driver of profits. Coming into Thursday morning's first-quarter financial report, investors hoped Goldman could overcome regulatory and other headwinds to produce profit growth; the investment bank more than delivered on those hopes, taking advantage of more favorable markets to boost its results and reward shareholders with a higher dividend. Let's look more closely at how Goldman Sachs fared and whether this is the start of a new trend for the investment bank.
Markets wake up, and Goldman profits
Goldman Sachs gave bullish investors what they wanted in its report, with sizable gains in sales and earnings highlighting the company's rebound to start 2015. Revenue of $10.62 billion was up 14% from last year's first quarter, reaching its highest level for any quarter in four years. Net earnings soared more than 40% to $2.75 billion, producing diluted earnings of $5.94 per share that crushed the $4.26 consensus figure among those following the stock. Using the Basel 3 guidelines, Goldman posted a Tier 1 common equity ratio of 12.6%, up from 12.2% at the end of 2014.
Looking at Goldman's various business segments paints a strong picture of the overall company. Investment banking revenue climbed 7% to $1.91 billion, its best result since before the financial crisis, as strength in Goldman's financial advisory and equity underwriting outweighed weakness in debt underwriting. The larger institutional client services division increased revenue by 23% from the year-ago level, again with equity markets leading the way while fixed income, currency, and commodities also posted modest sales gains. Goldman's revenue from its investing and lending activities jumped 9%, with two-thirds of the figure coming from gains from investments in equities. Only the investment management division had flat sales, as a drop in incentive-based fee income offset sizable gains from transaction-related revenue.
Goldman did its best to rein in expenses during the quarter. Compensation continued its inexorable climb, rising 11% from a year ago, but cost-cutting measures in other areas held the overall spike in expenses to 6%.
CEO Lloyd Blankfein was generally pleased by the fact that just about all of Goldman's businesses contributed to its strong performance. "Given more normalized markets and higher levels of client activity," Blankfein said in a press release, "we remain encouraged about the prospects for continued growth."
Sharing the good news with shareholders
Given the company's strong capital position, Goldman was able to reward shareholders by raising its dividend. Yet some will see the 8% increase to $0.65 per share on a quarterly basis to be less than stellar, as it still leaves Goldman with a relatively meager dividend yield of just 1.3%.
Goldman has been much more willing to return capital to shareholders through stock buybacks. Based on its most recent share count, the company paid about $270 million to investors in common dividends last quarter. However, Goldman spent a whopping $1.25 billion on stock repurchases during the quarter, buying back 6.8 million shares at an average cost of just above $185 per share. Moreover, Goldman has authority to repurchase another 18.6 million shares, which at current prices would cost the company about $3.8 billion.
Still, some investors fear Goldman hasn't entirely passed through its tough period yet. The investment bank boosted its reserves for litigation and regulatory proceedings to $190 million, up from $115 million in last year's first quarter. Nevertheless, in comparison to the billions that financial institutions have paid out in legal settlements over the past several years, it appears Goldman has largely worked its way through most of its legacy problems from the financial crisis era.
Goldman Sachs stock reacted somewhat positively to the news, even though the extent of the move didn't seem in line with the size of the earnings surprise, as shares climbed about half a percent in the first hour of pre-market trading following the announcement. If the first quarter truly marks the start of a longer-term turnaround for Goldman, though, shareholders can expect further gains throughout 2015 and beyond.