Bear markets are a big problem for Franklin Resources (NYSE: BEN) and its fellow asset managers. Since the S&P 500 is still muddling through such a downturn, investors have been particularly dour on Franklin's stock, pushing it down toward 10-year lows.
There are also longer-running issues at play here. But this resilient dividend payer has proved itself over time, which makes the 4.5% dividend yield worth a closer look for long-term income investors.
A sign of the times
When a stock's price gets cut in half, you know things are bad. That's basically the case with Franklin Resources, which is roughly 55% below its 10-year highs. There are a couple of factors at play.
From a long-term perspective, Franklin Resources is a money manager that charges its customers fees for its services. Its top and bottom lines are hugely impacted by the total amount of money it manages -- or assets under management (AUM).
For many years now, competing exchange-traded funds (ETFs) and index funds have been gaining share from the actively managed mutual funds that have long underpinned Franklin Resources' business. Some investors are worried that the company is a dinosaur that won't survive this ongoing industry transition.
That's probably not the right way to view the situation. For example, Franklin Resources has been adding index-based products to its portfolio and shifting toward investment niches (alternative assets) where active management is still considered a benefit.
It has also been buying competitors to increase its AUM, though this is a business approach that has been in play for a very long time. Meanwhile, the asset management business tends to be pretty sticky (changing to a new company can be a big headache), so the indexing shift isn't likely to lead to an overnight plunge in the business, and clearly hasn't. In other words, Franklin has been changing with the times and likely has plenty of time to continue the process.
The big bad bear
The near-term problem is a bit more acute. Since Franklin Resources' fees are based on its AUM, bear markets are a notable profit headwind. For example, in 2022, the S&P 500 fell roughly 20%. Franklin Resources' fiscal years end in September, so this isn't a perfect comparison, but its AUM dropped 15% in fiscal 2022 (ended Sept. 30, 2022), leading to a nearly 30% year-over-year decline in earnings per share (EPS). You can see pretty clearly how tough a bear market can be.
That said, the company's AUM has trended higher in each of the first two quarters of fiscal 2023, putting the figure 4% below year-ago levels at the end of the fiscal second quarter. Part of that is attributable to an acquisition that added $78.5 billion to AUM. But other important factors were the market's starting to move higher, and benefits from Franklin's diversification efforts. In fact, EPS improved 20% sequentially between the first and second fiscal quarters.
Despite the positive uptick with regard to sequential earnings, year-over-year EPS was still down 36% in the fiscal second quarter of 2023. So things are getting better in some ways, but there's still a reason investors remain worried. And yet the sequential improvements since the end of fiscal 2022 highlight the recovery potential as market conditions improve.
It is also important to note that Franklin Resources has increased its dividend annually for over 40 years. That's a period that included the COVID-19 bear market, the Great Recession, and the tech bust of 2000. This isn't the first time the company has experienced a tough market and managed to survive it while continuing to reward investors along the way.
This too shall pass
The most likely outcome, if history is any guide, is that the bear market is followed by a bull market and Franklin's business picks up again. The problem is that there's no way to know exactly when this will happen or what the period in between will look like, even though there are early signs that things are moving in the right direction.
The stock remains well off its peak, the current headwinds are likely to be temporary, the company is addressing longer-term issues, and the 4.5% dividend yield is historically high. You could just buy a super-safe CD and get that kind of yield, but you wouldn't get the potential upside of a business rebound or the dividend growth. Long-term investors might want to act now, given that the stock remains near the cheapest it has been in years.
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