Investment advisor Federated Investors (NYSE:FII) reported its first-quarter financial results on April 23, and it was yet another boring yet solid report. Net income and revenue both rose slightly from the year-ago period, though they came in just a little short of Wall Street analyst expectations. While the results aren't flashy, there's something to be said for Federated's steady, reliable results. Let's take a closer look at the details.
Things could be much worse
Historically, Federated Investors has been known for its money market products, but frankly, that hasn't been a good business to be in over the past five years. This is largely because of the insanely low prevailing interest rates, which limit interest yields for money markets. Factor in concern over potential regulatory changes that could drastically alter the money market landscape, and Federated Investors has been swimming upstream for a while.
However, the leopard has changed its spots, at least somewhat:
While the regulatory threat was essentially eliminated last year when the SEC finally ruled and made minimal changes, the prolonged low-interest-rate environment -- which could persist for years to come -- makes the company's strategy to shift its focus toward a broader mix of equity offerings look smart.
The low yields cost the company at least $29.5 million in operating income last quarter as the company waived fees in order to prevent some money market accounts from actually having negative yields after fees. That was actually a $2.9 million improvement from last year and a $2.7 million improvement sequentially.
For more perspective, consider this: Federated's total operating income in the quarter was $59 million after the fee waivers. If the company was still deriving half its revenue from money markets, those fee waivers would be taking a larger bite out of an even smaller pile of earnings.
Slow, profitable growth
While it's not sexy, Federated's strategy to gradually grow its asset base is paying off, if slowly. Revenue increased 4% from last year on 18% growth in Federated's equity asset base in Q1. While total managed assets decreased, the two most profitable asset classes -- equity and fixed income -- increased to $107 billion in the quarter.
This is partly by design because equity and fixed-income alternatives, unlike money markets, can provide income to investors.
Of course the benefit to Federated Investors, then, is that it won't have to waive its fees just to keep the investments above water as it must with some money market assets. In other words, they are -- as you've surely noted already -- much better for the bottom line.
No big steps, but a steady pace
Even as Federated Investors grows its other asset segments, money markets will remain an important part of its business. And until interest rates begin improving, these assets will weigh on profits. In the interim, the company is selling more equity and fixed-income assets, and frankly, more investors are interested in the better yields these products can provide right now anyway.
But eventually rates will increase, and Federated's money market business will benefit. Patient shareholders will also be rewarded, though there's no clear indication of how long it will take for the tide to turn. It's already been five years and counting. For the time being, expect small earnings growth and a steady dividend, currently yielding 2.9% at recent prices.
Jason Hall owns shares of Federated Investors. The Motley Fool recommends Federated Investors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.