Why I'm Holding My Shares in BlackRock
On March 1, co-founder, chairman of the board and CEO of BlackRock (BLK) Larry Fink sold BlackRock shares at $322 a share amounting to $12 million. CEO Fink sold about 37,600 shares out of his 1.1 million shares or 0.68% of BlackRock's shares outstanding.
Nevertheless, this event triggered me to revisit some financial ratios of the company.
Warning! GuruFocus has detected 2 Warning Sign with BLK. Click here to check it out.
The intrinsic value of BLK
Price action
From December 31, 2015 to present, BlackRock is just almost at breakeven.
Four facts about BlackRock:
Founded in 1988 by Larry Fink, Robert S. Kapito, Susan Wagner, Barbara Novick, Ben Golub, Hugh Frater, Ralph Schlosstein and Keith Anderson.
The company is the world's largest investor with $4.6 trillion in assets under management.
Founders hold 3% of total shares outstanding.
The company is probably more known for its iShares and ETF products.
Historical returns versus the S&P 500
BlackRock, if held for the previous decade, provided a total return including dividends of 281%. S&P 500 provided 92% total return.
Competitors
Using Yahoo Finance and GuruFocus' competitors list, I gathered the following list of competitors and arranged the group corresponding to their assets under management in billions of dollars.
The numbers
Revenue and growth
BlackRock had outperformed all peers except for Bank of New York Mellon (BK) in terms of revenue.
Profit and growth
BlackRock outperformed its peers once again.
Operating margin
BlackRock performs above peer average with operating margin.
Profit margin
BlackRock remained above peer average, earning 29 cents per dollar of revenue.
Book value and growth
BlackRock demonstrated flat growth in book value in recent years compared to its peers.
Free cash flow and growth
Free cash flow is above peer average.
Debt to equity
BlackRock appears to be conservative in taking debt to its balance sheet.
Valuation
Simple multiple
Capital asset pricing model (CAPM)
To find the growth numbers, I will apply the following growth numbers in red circle to my model and assume 5% terminal growth; further, I will use just 9% in the remaining five years of my model.
Other data not shown in the picture: Risk-free rate of 1.96% (10-year Treasury note), beta average of 1.5175, equity risk premium of 6%, 1.87% weighted interest rate of corporate debt, and 27.16% corporate tax rate.
In average, my models gave me the following valuation:
By these numbers, initial instinct would be for me to sell and capture most of my capital gains (I bought BlackRock shares when it was around $270 per share). Nevertheless, I am holding and wanting to receive future dividend payments.
Dividend reliability
Dividend payout ratio
Payout ratio never exceeded 50%, which I consider to be prudent of management.
Dividend and dividend growth
BlackRock has grown its dividend steadily over the years.
Percentage dividend and share buyback over profits
BlackRock has maintained about 80% profit payout when share buybacks were included.
Percentage dividend and share buyback over free cash flow
BlackRock has used up most of its free cash flow in handing out payouts to its shareholders.
Sustainable growth rate
BlackRock appears to have an acceptable sustainable growth rate. Sustainable growth is the realistically attainable growth that a company could maintain without running into problems.
Takeaway
With conservative payout ratios, growing dividends, conservative debt management, growing profitability and book value and impeccable management, I believe I am willing to hold on to my BlackRock shares years from now.
Happy investing!
Mark Yu
This article first appeared on GuruFocus.
Warning! GuruFocus has detected 2 Warning Sign with BLK. Click here to check it out.
The intrinsic value of BLK