BlackRock, Inc.'s (NYSE:BLK) stock price has appreciated close to 50% since I published my first article about the stock on GuruFocus back at the end of 2019. Since then, the company has continued to expand its horizons to secure its leading position in the global asset management industry.
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When a company matures from a growth perspective, the rational choice would be to distribute the bulk of earnings to its shareholders via dividends and buybacks. BlackRock is yet to reach this stage, but there are telling signs that the company will reward income investors handsomely for many years to come.
On Jan. 21, the company raised the quarterly dividend from $3.63 per share to $4.13. This 14% increase to the dividend was welcome news for investors, and there's reason to believe that this could be just the beginning of a streak of dividend hikes.
Recap of fourth-quarter earnings
BlackRock reported adjusted earnings per share of $10.18 in the fourth quarter of 2020 vs. the consensus estimate of $9.05, beating estimates by a handsome margin. This earnings beat did not come as a surprise to close followers of the company considering the fact that BlackRock has topped analyst estimates in each of the last five quarters before this one.
More interestingly, the company reported long-term net inflows in the fourth quarter as well, which goes on to highlight the positive impact on the asset management industry resulting from the improving macroeconomic conditions. BlackRock reported inflows from each of its reporting segments for the fourth quarter, and the below table provides a summary of long-term net flows.
BlackRock's Appeal as a Dividend Growth Stock
Source: Company filings
There is strong momentum from an earnings front, and Wall Street analysts have been revising their earnings estimates upward consistently in the last 60 days, which is a clear indication that BlackRock is continuing to grow at a faster pace than analysts initially predicted.
BlackRock's Appeal as a Dividend Growth Stock
Source: Zacks
When analysts are forced to revise their estimates upwards, it can be a positive sign, as it indicates the company is performing much better than it is expected to. More often than not, this characteristic leads to strong stock market returns as well.
The outlook
The fortunes of BlackRock are closely tied to the performance of the asset management industry. Business conditions are once again improving after reaching record lows in early 2020, and this will prompt many investors to embrace risky assets such as equities.
For an asset manager of BlackRock's scale, this is good news as equities generate higher fees than passive investment products. If interest rates remain low as expected, global stock markets are likely to perform strongly this year as well.
With assets under management of over $4.4 trillion, equity strategies account for over half of BlackRock's AUM, which makes stellar stock market performance a recipe for success for the company. In the alternative scenario where interest rates might move higher, which could happen if inflation gets out of control, I believe BlackRock will still be standing in a strong position to deliver earnings growth because of its diversified product offerings.
Timely acquisitions have played an important role in the growth story of BlackRock, and the company continues to look for opportunities to scale up its business operations. Below are some of the recently completed deals that are already proving to be value accretive.
Citibanamex's asset management business in 2018.
Tennenbaum Capital in 2018.
eFront in 2019.
Aperio Group in 2020.
At the end of 2020, BlackRock had more than $6 billion in cash, and it would not come as a surprise if the company continues to hunt for target companies that could add value in the long run. Answering a question from an analyst during the fourth-quarter earnings call, BlackRock CEO Larry Fink said:
Going by these remarks, BlackRock seems to be focused on expanding its footprint internationally to capture the expected growth in this market segment. A good deal could pave the way for the company to significantly improve its operating performance in the equities segment as the rising middle-income society in Asia is expected to be more risk-tolerant than developed market investors.
Asset management fees, however, are in a secular decline, which is the biggest risk of investing in this industry. BlackRock has been able to maintain its operating margins as a result of its leadership in the passive products segment, and this competitive advantage will likely help the company earn economic profits for many years to come as the negative impact resulting from low fees will be offset by an increase in market share.
A dividend champion in the making
Income investors constantly look for companies with a streak of dividend hikes as such companies are likely to do the same in the future as well. David Fish created the Dividend Champions list in 2007 in which he used a robust model to identify companies that are likely to reward investors in the long run. This report is published on a monthly basis even today, and to be selected for this list, a company has to maintain a track record of split-adjusted dividend hikes for at least 25 years. BlackRock, as illustrated below, has increased its dividend in each of the last 11 years.
Considering the positive earnings momentum, competitive advantages and the stage of the business cycle the company represents, it would not come as a surprise to me if BlackRock continues with its healthy dividend streak for a very long period of time.
BlackRock is not cheap, but the premium is worth paying for
BlackRock stock is trading at forward earnings multiples of over 23, which is significantly higher than its five-year average of 18.46. From this perspective, shares might seem overvalued. However, in my opinion, the company deserves to trade at a premium to its peers and historical valuation multiples, as its profitability has improved considerably over the last five years.
Gurus remain bullish
Investing gurus including Mario Gabelli (Trades, Portfolio) and Joel Greenblatt (Trades, Portfolio) have added to their long position in BlackRock in the recent past, which is a sign that they believe there's more upside to the stock despite the recent run-up of the price.
BlackRock's Appeal as a Dividend Growth Stock
Source: GuruFocus
Takeaway
BlackRock might not be the ideal pick for growth investors who are looking for multi-bagger opportunities, but I think value and income-oriented investors have nothing to complain about where the company is headed. BlackRock announced a 14% dividend hike earlier in the month, and the company looks well set to be able to continue its 11-year dividend growth streak in the foreseeable future. This makes BlackRock a strong candidate as a dividend growth stock.
Disclosure: The author does not own any shares mentioned in this article.
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