Back to Growth: Affiliated Managers Group

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Stock: Affiliated Managers Group (ticker AMG)

Asset manager rewards shareholders with dividend payouts

Share price of Affiliated Managers Group has hovered near one-year highs in recent times as the $10 billion Florida-based asset manager delivered 1.4% revenue rise in its recent first-half operations and a more impressive 17.2% profit increase to $248.8 million resulting in 22.3% margin compared to 19% a year earlier.

The asset management group recorded $13.6 million investment and other income, and $1.3 million lower in operating expenses resulting in more profitability in the period.

Assets under management, a critical metric for asset managers, grew 19% year over year to $772 billion.

Nonetheless, Affiliated Managers Group outperformed the S&P 500 index nearly twice so far this year having generated 24.21% total gains compared to the index’s 13.33% (Morningstar).

Meanwhile, the company trades at a slight discount compared to its peers with PE 20 times vs. industry average 21.3 times, and a good 40% discount compared to its three-year average.

Affiliated Managers Group
Affiliated Managers Group was founded in 1993. As per company filings, the company is a global asset management company with equity investments in leading boutique investment management firms, which the company refers to as its “Affiliates.”

Affiliated’s innovative partnership approach allows each Affiliate’s management team to own significant equity in their firm and maintain operational autonomy.

Further, the company’s strategy is to generate shareholder value through the internal growth of existing Affiliates, as well as through investments in new Affiliates, and additional investments in existing Affiliates.

In addition, Affiliated provides centralized assistance to its Affiliates in strategic matters, marketing, distribution, product development and operations.

The company holds meaningful equity interests in each of its Affiliates.

In certain cases, Affiliated owns a majority of the equity interests while in other cases it owns a minority of the equity interests.

In all cases, Affiliate management retains a significant equity interest in its own firm.

In 2016, Affiliated generated 67% of its revenue in the United States, 26% in the United Kingdom, and the other in remaining other countries. Affiliated derives most of its revenue from asset-based and performance fees from investment management service.

According to filings, Affilated has determined to report just one segment from three in its previous fiscal year.

Sales and profits
In the past three years, Affiliated registered 0.09% revenue growth average, profit growth average of 9.5%, and profit margin average of 20.1% (Morningstar).

Cash, debt and book value (equity)
As of June, Affiliated Managers Group had $365 million in cash and cash equivalents and $2 billion in long-term debt with debt-equity ratio 0.73 times compared to 0.56 times a year earlier. Long-term debt fell by $105 million year over year while equity rose $681 million to $3.6 billion.

In addition, 48% of the company’s $8.6 billion assets were labeled as goodwill and intangibles.

Cash flow
In the first half, Affiliated’s cash flow from operations increased by 30% year over year to $444 million brought by higher profits, and cash flow from the company’s distributions of earnings received from equity method investments among others.

Capital expenditures were $7.2 million leaving the company with $437 million in free cash flow compared to $332 million a year earlier.

In addition, Affiliated allocated $354 million in debt reduction (net issuances/other financing activities), and dividends and share repurchases represented 39% of its free cash flow.

The cash flow summary
In the past three years, Affiliated allocated $77 million in capital expenditures, reduced its debt by $614 million net issuance/others, raised $565 million in share issuances, generated $3.55 billion in free cash flow, and paid out $638 million (mostly share repurchases) at an average payout ratio of 18%.

Conclusion
Affiliated did seem to exhibit a good turnaround in both revenue and profits. The company’s business generator and critical metric–assets under management–has been steadily growing in recent years.

Meanwhile, it is important to remember that the company had a poor performance in its prior year brought by its consolidation of Affiliate average assets under management at existing Affiliates. Investors should try to foresee if this trend would continue moving forward as this activity may potentially result in lower profits.

As of its recent filing period, Affiliated also exhibited a leveraged balance sheet and nearly half of its assets were labeled as goodwill and intangibles while having kept a relatively conservative payout ratio.

The company’s recent dividend payouts are welcoming for its shareholders as it has maintained this payout ratio in recent years.

Analysts have an average overweight recommendation with a target price of $201.33 vs. $179.87 at the time of writing. Multiplying previous PS multiples to the average revenue estimates with a 25% margin indicated a per share figure of $127.21.

In summary, Affiliated is a hold with $190 price target.

Quotes
Sean M. Healey, Chairman and Chief Executive Officer of AMG.
“AMG generated strong results in the second quarter across our key operating metrics, including Economic earnings per share of $3.33, positive net client cash flows, and a year-over-year increase of 19% in our assets under management, to a record $772 billion.”

“Through the ongoing execution of our growth strategy, including consistent alpha generation by our Affiliates, positive organic growth from net flows, and the continued success of our strategy to partner with the leading boutique firms worldwide, we have meaningfully increased the earnings power of our business.”

“During the second quarter, AMG generated positive net client cash flows of $1.8 billion, as ongoing strong demand for a wide range of alternative strategies from both institutional and retail clients was partially offset by continued net outflows in U.S. equities.”

“In a dynamic market environment, our Affiliates are well-positioned to outperform peers and benchmarks, building further on their long-term track records of leading investment performance. With our Affiliates’ outstanding offerings across attractive alpha-oriented product areas, we have excellent prospects for continued strong organic growth going forward.”

“Looking ahead, given the significant and growing scale of our global business, we are confident in our ability to continue to generate meaningful earnings growth through accretive investments in outstanding new Affiliates, while also consistently returning capital to shareholders through our quarterly cash dividend and share repurchases. With this disciplined commitment to capital allocation, along with the organic growth of our Affiliates, we are uniquely positioned to create long-term shareholder value.”

Disclosure: I do not have shares in any of the companies mentioned.

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