As a dividend growth investor, my goal is to buy high-quality stocks that can increase their dividends over time. This helps my passive income exceed inflation, which increases my purchasing power when combined with dividend reinvestment and fresh capital.
BlackRock (NYSE:BLK), the world’s largest asset manager, accounts for 1.2% of my annual dividend income and is the 22nd largest holding in my stock portfolio, which includes 95 dividend payers. So why do I have such faith in the stock? For the first time since February, let’s examine BlackRock’s dividend safety, recent operating performance, risks, and valuation.
An Attractive Trio Of Yield, Growth, And Safety
For a multitude of reasons, BlackRock is an excellent dividend payer.
The stock’s dividend yield of 2.97% is lower than the asset management industry’s average dividend yield of 4.07%. The dividend is safer than its rivals without even considering BlackRock’s adjusted diluted EPS payment ratio. Even so, a yield of around 3% is a good starting point for income investors.
BlackRock’s adjusted diluted EPS payout ratio in 2021 was 42.2%, based on the $16.52 in dividends per share given to shareholders and the $39.18 adjusted diluted EPS. However, due to the predicted slump in financial markets in 2022, the payout ratio is expected to rise to 57.9%. This is because the 2022 dividends per share will be $19.52, compared to the average analyst-adjusted diluted EPS figure of $33.69. Even while BlackRock’s payout ratio will be fairly high for an asset manager in 2022, this is solely because of temporarily lower profitability. As a result, I expect dividend increases will lag somewhat behind profit growth in the coming years.
And, with analysts predicting 8.4% annual adjusted diluted EPS growth over the next five years, I’m lowering my long-term dividend growth forecast to 7.5%.
first-half operating results satisfactory
In the first half of 2022, BlackRock recorded total revenue of $9.2 billion. In comparison, this was up modestly yearly. BlackRock’s average assets under management, or AUM, increased 3.3% yearly to $9.3 trillion in the first half. Net inflows of $460 billion over the previous four quarters enabled the firm to flourish despite extreme market volatility.
However, BlackRock’s decreased performance fees more than offset the modest increase in average AUM.
Increased expenses, mostly due to rising distribution and service costs, pulled the company’s non-GAAP net margin down 72 basis points year on year to 27.2% in the first half. However, this was only somewhat offset by a 0.9% decrease in BlackRock’s weighted-average diluted shares outstanding during the quarter, to 153 million (figures per page 4 of 14 of BlackRock Q2 2022 earnings press release).
These factors contribute to the company’s adjusted diluted EPS falling 1.6% yearly to $16.43 in the first half of 2022. However, BlackRock’s operational earnings will increase if the economy recovers and markets begin to recover.
Meanwhile, stockholders may be certain that the firm is extremely lucrative, even during the current market slump. Through the first half of 2022, BlackRock’s interest coverage ratio remained healthy at 28.3. This suggests that the corporation should have no trouble meeting its financial obligations shortly.
Risks To Consider
BlackRock’s first-half performance was commendable. However, there are still hazards that potential and present stockholders should be aware of. For example, economic uncertainty may cause equities to retest recent lows, resulting in a 7% decline in the S&P 500 from present levels. This would be a drag on BlackRock’s financial results in the short term.
Moreover, the firm must continue to beat its counterparts while being a well-established asset manager. Otherwise, it risks net outflows rather than net inflows, which have been constant throughout its company history.
A World-Class Business At A Discount
In my opinion, BlackRock belongs in any dividend growth stock portfolio. However, it also looks undervalued, based on my inputs into two valuation models. The discounted cash flows (DCF) model is the first valuation technique I’ll employ to determine the fair value of BlackRock’s shares. There are three inputs to the DCF model.
The DCF model’s initial input is adjusted diluted EPS. Over the previous four quarters, BlackRock has earned $37.80 in adjusted diluted EPS. Growth assumptions are the next input into the DCF model. Over the next five years, I expect BlackRock’s adjusted diluted EPS will expand at a 6% annual rate. I anticipate a drop to 5% annual earnings growth in the following years.
Summary: BlackRock Is A Nice All-Around Buy
BlackRock is a dependable dividend growth stock. With 13 years of dividend growth, the business is classified as a Dividend Contender. Normally, BlackRock’s first-half performance would not have been promising. However, considering the current state of the financial markets, relatively stable sales and earnings are a sign of strength. And based on my inputs into the discounted cash flows and dividend discount models, the company is selling at an 18% discount to fair value. This makes the stock an excellent choice for income, value, and growth investors.
Featured Image – Megapixl © Ra2studio
