For dividend growth investors, there are few better places to look for high-quality stocks to buy than the list of Dividend Aristocrats. When it comes to dividend growth stocks, the Dividend Aristocrats are among the market's best. The Dividend Aristocrats are a group of just 53 stocks in the S&P 500 Index, that have each raised their shareholder dividends for at least 25 consecutive years.
Franklin Resources (BEN) is a Dividend Aristocrat offering an unusually high dividend yield. In fact, the dividend yield is currently at a 10-year high. Shares of Franklin Resources have declined nearly 30% in the past year, as the asset management industry as a whole is under attack, from discount brokers and low-cost exchange-traded funds luring client assets.
But Franklin Resources continues to execute on its strategic priorities. Earnings appear to have hit a bottom, and a turnaround appears intact. The stock could be an attractive pick for value and dividend investors.
Navigating a Tough Industry Climate
Franklin Resources is an investment management company. It was founded in 1947 and named after Benjamin Franklin, the founding father who was viewed as a symbol of frugality and smart investing. Today, Franklin Resources manages the Franklin Templeton family of mutual funds, with approximately $717 billion of assets under management at the end of last quarter.
This is a highly challenging time for the asset management industry. Competition for client assets has become fierce, prompting many brokerages to cut fees and trading commissions in an effort to retain clients. The industry is battling outside forces, from lower-cost options that have compelled investors to embrace do-it-yourself investing. For example, the onset of ETFs, many of which have significantly lower expenses than traditional mutual funds, has pressured major asset managers such as Franklin Resources.
Franklin Resources' assets under management, or AUM, fell 5% in fiscal 2018. This caused the company's operating income to decline 6% in the previous year. Despite the weak performance last year, the company still has a positive long-term growth trajectory.
Positioned for Growth
First, the U.S. is an aging population. There are thousands of people retiring each year. As the population ages, along with increasing life expectancy, the need for retirement planning services is higher than ever.
There should always be a need for the financial services provided by Franklin Resources. The company has seen AUM increase again in recent periods. Franklin Resources will also be able to grow AUM through acquisitions of smaller firms. It recently acquired alternative credit manager Benefit Street for an undisclosed sum. Benefit Street has $26 billion in AUM. Further deals are not out of the question, as Franklin Resources has a strong balance sheet, and consolidation is typical in a highly competitive and fragmented industry.
Franklin Resources is also investing in new service capabilities. Last quarter, it launched Franklin Templeton Private Equity LLC, a new joint venture with Asia Alternatives Management LLC. This will give the company a new business line in alternative credit assets, a growing category.
Share repurchases will also contribute to future earnings growth. Franklin Resources reduced its diluted share count by 6% in fiscal 2018, which helps boost earnings-per- share growth. This is particularly true when the share price is low, as the company can buy back even more shares than it could if the share price were higher. Franklin Resources is a shareholder-friendly company, that returns lots of cash to shareholders including repurchases and dividends.
Handing Lots of Benjamin Franklins to Shareholders
Perhaps the most attractive aspect of Franklin Resources as a stock investment is the company's generous cash returns to shareholders. While 2018 was a challenging year for its fundamentals, Franklin Resources returned $3.5 billion to shareholders through buybacks and dividends, a 191% increase from the previous year. For example, the company announced two separate dividend increases during 2018 -- a 15% increase in June, and another 13% raise in December. Not only that, but Franklin Resources also paid a special dividend of $3.00 per share in 2018, along with its regular quarterly dividend.
The increased cash returns have not been enough to offset Franklin Resources' declining share price over the past year. But investors sitting on the sideline have the opportunity to buy shares of Franklin Resources at an unusually high dividend yield. Thanks to the company's continued dividend increases, the stock now has a current yield of 3.3%, representing a 10-year high for the shares.
And the dividend appears to be secure. With 2018 expected EPS of $3.50, the forward dividend of $1.04 per share represents a payout ratio of just 30%. This is a highly sustainable payout ratio, which secures the current payout and even allows for future dividend increases.
The past few years have not been easy for Franklin Resources, nor for the broader asset management industry. But while others are sitting still, Franklin Resources is working aggressively to return to growth, primarily through acquisitions. Earnings growth is still intact for the company, thanks to earnings growth and the impact of tax reform.
With a low stock valuation, a solid 3.3% dividend yield, and double-digit dividend growth potential, Franklin Resources stock still has a lot to offer value and dividend investors.
(This article was originally sent to subscribers of TheStreet's Income Seeker, a product presenting the world of opportunities in fixed income and dividend stocks. Click here to learn more about Income Seeker and to receive articles like this each day from Nick McCullum, Peter Tchir, Chris Versace and others.)