When it comes to gambling, everyone knows that the “house always wins.” The odds are always stacked in the casino’s favor when we place our bets. The same can be true for investing. While buying a mutual fund, exchange-traded fund (ETF), individual stock or other financial product is perhaps less risky than playing a hand of black jack, the deck is still stacked so that the providers of these products are winning.
With that in mind, the “casinos” of the investment world (the asset managers) offer plenty of growth and dividend potential for investors. And no one has a bigger casino than BlackRock (BLK ).
The firm’s sheer size and scope is unmatched and BLK’s latest earnings report highlights many of the ways that the asset manager could be a great long-term investment for dividend seekers. All in all, buying BlackRock stock itself may be a better bet than buying into one of its funds.
All About Fees at BLK
$4.74 Trillion. That’s trillion with a T. This is a staggering sum of money. It also happens to be the amount of assets underneath BlackRock’s watch. With that amount of assets under management, BlackRock is the largest asset manager in the world. BLK’s umbrella covers everything from simple index mutual funds and ETFs to complex hedge funds, derivatives trading and risk analytics products. This huge product line and asset base does one thing for BLK.
Collect plenty of fee income.
After all, whether you own a stake in an index fund or global macro hedge fund, you pay a management fee. With such a huge asset base, BLK collects fees from investors big and small. In this case, the firm managed to report revenues of $11.4 billion last year and managed to earn $3.3 billion in profits based on operating various investment products.
That’s not too shabby at all. But the real beauty is that this could be just the beginning
Plenty of Growth Avenues
While some critics may point to the fact that BLK saw a 20% drop in profits this quarter as investors chose less profitable indexed products, that critique may be misguided. Indexing, particularly with BLK’s insanely popular iShares line of ETFs, is what’s going to drive fee income higher in the future.
The Department of Labor’s new fiduciary standard rules basically drive home the idea that financial advisers must put clients’ interests first. Broker-sold products with their sales loads are going the way of the dodo. That should help push investors into more passive and low-cost products like iShares ETFs. BLK is already seeing that. iShares took in nearly $25 billion in new client money this quarter. And while expense ratios have dropped at the unit, more money coming in boosts profits over the long term. Think of retailer Wal-Mart (WMT ) earning less per sale, but selling way more than the competition.
As if that wasn’t enough, BLK has some impressive fintech potential as well. BlackRock’s robo service FutureAdvisor should also see an uptick in business as investors switch from brokers to low-cost services. Meanwhile, its high-tech risk management service Aladdin continues to sign up pension funds, banks, endowments, and insurance companies at a rapid pace as new banking regulations force financial firms to reevaluate risk.
All in all, these areas plus BLK’s continued expertise in bonds and bread-and-butter asset management should continue to generate plenty of fee income over the long haul.
Already Rewarding Shareholders
The continued gains in fee income should continue to trickle down towards investors, if BLK’s history can serve as a guide.
BlackRock is quickly becoming a dividend champion. Since its IPO, BlackRock has managed to increase its payout a whopping 816%, with the latest being a 5% bump during the first quarter. BLK shares now yield 2.56%. That’s more than the sector average.
BLK has also rewarded investors on the buyback front as well. Over the last four quarters, BlackRock has managed to repurchase around $1.1 billion worth of its own stock. What’s more is that these buybacks have actually benefited shareholders by shrinking total share counts over the long term.
All in all, any continued gains in assets as well as in its higher-margined fintech offerings should help drive the trend of higher dividend increases at BlackRock for years to come.
The Bottom Line
Investors need to bet on the house. And there’s no bigger house than BlackRock. The firm continues to gather assets in a variety of low tech (iShares ETFs) and high tech (Aladdin, BlackRock Solutions) businesses. That will help drive management fees and ultimately, dividends, over the long haul.
BlackRock isn’t cheap when looking at its peers. But the firm’s dominant position, high dividend history/growth and potential growth avenues make that slight premium worth it.