Legg Mason’s Distribution Supports Its Valuations in 4Q15
Legg Mason Beats Estimates for Fiscal 4Q15 and Annual Earnings (Part 5 of 5)
Repurchases and dividends
Legg Mason (LM) generated a ~4% return for its stock owners on May 1, after the announcement of its quarterly results beat analyst estimates. Investors were expecting lower assets under management, but the company beat estimates backed by strong operating performance and new investments in its debt funds.
Legg Mason also declared a 25% increase in its quarterly cash divided to $0.20 per share. The company utilizes its reserves to buy back its stock at attractive prices. The company completed additional open market purchases of 1.6 million shares in 4Q15.
Legg Mason manages a dividend yield of ~1.2% for its investors, compared to Franklin Resources (BEN) at 2.0%, T. Rowe Price (TROW) at 4.7%, Invesco (IVZ) at 2.3%, and BlackRock (BLK) at 2.2%. Together, these companies account for 2.52% of the Financial Select Sector SPDR Fund (XLF).
Trading at a discount
Legg Mason (LM) is valued at 13.4x on a one-year forward earnings basis compared to its peers trading at 15.5x. Its valuation on a standalone basis has improved, but is still at a discount compared to its peers. The company was trading at 11.9x on a forward price-to-earnings basis in May 2014. Legg Mason’s focus on bringing more active strategies combined with expense management has helped it to generate better operating performance in fiscal 2015 as compared to fiscal 2014.
From our perspective, Legg Mason needs to invest in its distribution channels that are yielding that extra diversified revenue and giving an edge to its asset management business. The company needs to increase the offerings for its retail clientele, which contribute only 26% of its total assets under management. The raising of funds can be further diversified, as investors have renewed their interest in emerging market offerings.
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