Despite the underwhelming fourth quarter results, I don't really see a reason to sell my shares of UBS Group (UBS) . The company remains one of the biggest players in the investment world. I don't think rough market conditions will change that over the long term. Do I think we'll see some continued volatility through the first half of 2019? It's very likely; but the dividend yield and strong cash position are what I am interested in for the short term. Short-term volatility only matters if you need liquidity, in which case you probably shouldn't be invested anyway.
UBS suffered from outflows of client money in their wealth management business. This isn't that crazy when you consider market conditions. The bank reported that clients pulled $13 billion in assets in the fourth quarter. That's a lot of money and the effects that it could have on their revenue from wealth management will probably last into 2019 unless UBS see's a reversal. Its understandable to see some people protect their wealth from the fourth quarter marketplace. The effects of uncertainty over the ongoing Brexit ordeal, coupled with concerns about the European economy certainly echoed in the minds of investors. It's not shocking to see clients move to cash. I certainly share the sentiment that cash is king right now. That said, the current market offers opportunities for long-term plays. I couldn't resist buying some UBS a few weeks ago.
Fourth-quarter earnings overshadowed a successful year for the bank. Operating income declined 3.2% to $6.97 billion. I won't really compare the fourth quarter's net earnings of $696 million to the prior year's as UBS' fourth quarter 2017 included losses from U.S. tax reforms make the comparison less meaningful. On a pretax basis, the bank did well. Operating profit before taxes increased 2% year over year to $862 million. Net earnings did come in below expectations of $729 million from analysts; largely prompting the nearly 5% pullback today at the time of writing.
No doubt the next few weeks will be clouded by reverberating fears that UBS is losing a big chunk of its managed assets. The stock will be mixed. It's understandable to not like seeing investors pull $8 billion from the bank's wealth management group and another $5 billion from asset management -- but it's not the end of the world. I view it as a symptom of market sentiment itself, not UBS. Naturally a decrease in managed assets of $13 billion will certainly dampen revenue potential moving forward, so we must look at the stock from an earnings perspective.
Fourth-quarter earnings were $0.18 per diluted share. Once again, the effects of last year's tax reforms make comparing the earnings to last year's loss of $0.72 a share a less meaningful endeavor. UBS finished the year with $1.27 in earnings per share; giving the stock a valuation of 10.26x earnings at the time of writing. UBS didn't really provide numerical guidance in its earnings release; instead simply stating that the effects of the capital outflows and market conditions would continue to weigh on revenues in the first quarter of 2019. I won't venture to guess what this will mean over the course of the year. I expect Q1'19 to be very similar to Q4'18. My presumption is that the cheap nature of the stock at present provides insulation from the lower assets at hand. Barring any massive further disruptions to revenue, I think things will be okay over the long run. Short term you're taking the volatility in order to ride the dividend.
I am looking at UBS as a long-term investment in diversified financial services. They work in every major market, and offer a strong yield at a low valuation right now. Yes, there are concerns of slowing worldwide growth. But over the long term, shares in UBS should pay off. I am considering adding to my position in the next few weeks if the markets pull shares down further. At the end of the fourth quarter, the bank had over $108 billion in cash/balances on hand. I am in no way concerned for their ability to maintain their 5% dividend payments. Coupled with the announced plan of $1 billion in share buybacks this year, I think UBS is offering a nice deal for those willing to collect interest and hold it for the long haul. In times of strife, people are inclined to pull their money. That doesn't mean they won't want those time tested asset managers to manage it again when conditions improve.
