BlackRock Stock: Down But Not Out (NYSE:BLK)

Coal Workers Union Pickets Outside BlackRock Investors In New York City

Spencer Platt

Written by Nick Ackerman. This article was originally published to members of Cash Builder Opportunities on July 17th, 2022.

BlackRock (NYSE:BLK) recently posted its Q2 results. The stock has fallen considerably as the overall broader market has come down, which isn’t atypical for an equity position. However, BLK is even more susceptible to market conditions given its heavy reliance on managing assets and capital. As valuations come down across the board, suffice it to say their fee generation will also come down.

That’s why it isn’t surprising to see that earnings and revenue have taken a hit. Actually, what might be a bit more surprising is that the revenue year-over-year was only off 6%, given the nearly $9.5 trillion AUM they were managing at this time last year. That compares to the ~$8.5 trillion they reported at the end of this latest quarter.

The majority of this hit seemed to be priced in, too, because the stock didn’t sell off significantly. They also participated in the rally the next day and regained all the lost ground.

For a longer-term investor, a current trading level is a place where one could be putting money to work in this stock. Shares are off around 38% from the 52-week high. I believe that BLK might be down, but I definitely don’t believe this asset manager behemoth is out. Despite it being tough in the shorter term and the volatility, BLK also now offers a 3.25% yield.

BlackRock Price and Dividend Yield

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BlackRock Q2 Earnings Results

As we touched on above, the stock revenue declined only around 6%. This was in-line with analyst expectations. On the EPS is where they missed expectations, coming in at non-GAAP EPS of $7.36. That was a decline of 30% in the prior year. That resulted in a miss of $0.66 of what analysts were expecting. Diluted EPS was $7.06 and marked a decline of 21%. Missing analyst expectations is a rather rare event for BLK.

BlackRock EPS Surprise

BLK EPS Surprise (Seeking Alpha)

While total AUM had declined, it was at least partially offset by quarterly inflows of $90 billion. That means investors were still putting cash to work over the period. To me, that’s smart because this is a time when we should be buying. This was across the board, with strategic ETFs and institutional indexes being large contributors. Where AUM declined was in the retail category.

BlackRock Inflows/Outflows

BLK Inflows/Outflows (BlackRock)

Unfortunately, retail clients were the ones pulling their money out, contributing to the outflows. This is the stereotypical outcome when there is a sell-off. Institutions put capital to work, and retail pulls their investments out of the market. They get back in once they see a couple of good years of returns, and the cycle repeats. Through 2021, as an example, they had meaningful inflows.

They primarily pulled from fixed-income and multi-asset investments. Here are some further details on the conference call:

Retail net outflows of $10 billion reflected industry pressures in active fixed income and world allocation strategies, partially offset by strength in index SMAs, municipal bonds and our systematic multi-strategy alternatives fund. Gross sales in U.S. active mutual funds have remained strong, but were offset by elevated redemptions from long-duration fixed income, high-yield and growth equities.

Interestingly, when it is broken down by category, they were putting capital to work in alternatives.

BlackRock Retail Flows

BLK Retail Flows (BlackRock)

On the other hand, ETFs are also going to be invested in by individual investors too. That saw inflows, so retail is still investing. It was just the opposite, though, in terms of where the capital was being allocated. Capital went to work in equity, fixed-income and multi-asset. Alternatives, in this case, saw the outflows.

BlackRock ETF Flows

BLK ETF Flows (BlackRock)

They even noted that May 2022 was a record month of inflows:

Today, both individual investors and large institutions are using bond ETFs for convenient, efficient exposures to thousands of global bonds and to make quick specialized recalibrations to their portfolio. In other words, they are using bond ETFs for active investing. The challenges associated with high inflation to rising interest rates are attracting more first-time bond ETF users and prompting existing investors to find new ways to use ETFs in their portfolios for active investing.

In the second quarter, we generated $31 billion of fixed income ETF net inflows led by a record flows in the month of May. Fixed income ETFs once again delivered the market quality that clients expected from us in stressed markets, providing liquidity, providing price transparency, U.S. fixed in ETF trading volume reached new records. In fact, the second quarter average volumes was up over 50% compared to last year.

Looking Forward

Analysts aren’t too confident in a strong year for BLK overall for 2022. Again, this appears to be reflecting the fact that markets are going to be challenged here. Analysts believe that revenue will decline 5.5% through the year. For what it’s worth, if we look at BLK’s first six-month period, revenue is essentially flat. $9,225 million compared to $9,218 in the same six-month period a year prior.

For EPS, they expect an even sharper decline of over 11.5% for the year. However, this will reverse and grow in the next couple of years if analysts are correct.

BlackRock EPS Expectations

BLK EPS Expectations (Seeking Alpha)

Helping to support that growth is the share repurchases the company has implemented. While other financial institutions might be cutting back and freezing their buybacks, BLK has every intention of continuing to repurchase its shares.

They expect to repurchase $375 million worth in the quarters coming ahead. In the year’s first half, they repurchased nearly a billion worth of shares. So the remainder of the year might be more moderate if they stick to the lower amount. They’ve been fairly steady with buying back their shares every quarter.

BLK shares outstanding

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BLK Stock Valuation

The results could be a bit worse if they already missed the EPS target this quarter. Despite that, the stock is still only trading at a forward P/E of 17.35. That’s below the decade-long average P/E of around 18.51, with the current P/E of around 15.09. I believe this puts us in a situation where the valuation

We can see just how elevated the stock was when it was trading in the $900 range too. In that scenario, it appeared that investors were expecting assets to just rise to infinity. Definitely overpriced at that time, but I consider this one of my core holdings. So I don’t go buying and selling from year to year. In hindsight, that would have been the better play.

BLK PE ratio

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If we enter into a deeper recession, there could be more pain ahead. However, that isn’t going to be knowable until it happens. Therefore, I believe that starting to dollar-cost average at these levels could be appropriate.

BLK Dividend

Speaking of a recession, one might want to know if the dividend is safe. I believe that it is given their commitment to returning capital back to shareholders. That is both through their dividend and share repurchases. If things get even tougher, they can dial back on the share repurchases.

Given the record of 18 years of consecutive dividend growth, I believe this remains a top commitment. That’s as many years as they’ve been paying a dividend. Over the last decade, they have provided a CAGR of 12.10% for their dividend.

BLK Dividend History

BLK Dividend History (Seeking Alpha)

2022’s dividend gave us a huge increase coming in at around 18%. That was well ahead of the prior years. I don’t suspect that we will quite see the same boost when they announce for 2023. I would be quite happy with around a 5% increase.

At $4.88 a quarter, investors are looking at a current dividend yield of 3.25%.

Conclusion

BLK is down but not out. In my opinion, the stock is going through what we would expect in a broad market sell-off. This time the stock is getting hit on both the equity and fixed-income side. With both sides of the equation under significant pressure, their AUM is dropping quite rapidly. That AUM is what essentially drives their earnings and revenue engine as they earn fees based on the amount invested.

Inflows are continuing to come in, which will help make them stronger on the other side. They continue to offer investment products that are convenient for investors. While waiting for a recovery, the shares pay a 3.25% dividend yield, with a dividend expected to continue to grow going forward.

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