On Dec 23, 2015, we issued an updated research report on New York based investment management firm Federated Investors, Inc.FII . We believe organic growth backed by consistent top-line growth remains the growth driver for the company. However, low interest rates and lower assets under management (AUM) acted as the headwinds.
Riding on a strong top-line performance (up 8% year over year), Federated has delivered a positive earnings surprise of 5.0% for third-quarter 2015. Notably, over the last four trailing quarters, Federated has recorded an average positive earnings surprise of 2.53%.
Federated's efforts to enhance shareholder value through its efficient capital deployment activities are commendable. In February 2015, the company raised its share repurchase authorization to an additional 4 million shares. Also, the company has been regularly paying dividends of 25 cents per share each quarter, following a 4% hike in July 2013.
Further, in the last few years, Federated has deployed capital towards strategic deals and thereby expanded operations in the United Kingdom and Chile. On the international side, management is planning to register a Canadian domicile strategic value dividend fund product before 2015 end, with sales efforts to commence in the first quarter of 2016.
Though Federated exhibits decent fundamentals, we remain cautious due to the current economic uncertainty across the industry. These include volatile equity markets, the ongoing fee waiving trend in money market funds to maintain positive or zero net yields and the prevailing stringent regulatory landscape.
Notably, fee waivers for fourth-quarter 2015 will likely result in a negative pre-tax impact in the similar range witnessed in third-quarter 2015. However, the company estimates 10 basis points (bps) gain in gross yields on securities purchased in money market fund portfolios from the third-quarter 2015 levels to lessen the impact of minimum yield waivers by about 45% and a 25 basis points gain in gross yields to reduce the impact by around 65%. The company expects to recover around two-third of minimum yield waiver-related pretax income when money fund yields rise to the point of eliminating these waivers.
The Zacks Consensus Estimate over the past 30 days remained stable at $1.60 and $2.03 per share for 2015 and 2016, respectively. Hence, Federated currently carries a Zacks Rank #3 (Hold).
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