Recent Buy – BLK

Well, I certainly just got lucky. I just got a Christmas bonus that I wasn’t expecting. It was small, but I feel blessed to have gotten anything. So naturally, whenever I come into unexpected money, I try to invest as much as rationally possible. So with my bonus, I just bought 3 shares of BlackRock Inc (NYSE:BLK) at a cost of $362.18 a share.

Company Summary:

BlackRock, Inc. (BlackRock) is an investment management firm. The Company provides a range of investment and risks management services. The Company’s clients include retail, high net worth (HNW) and institutional investors, consists of pension funds, official institutions, endowments, insurance companies, corporations, financial institutions, central banks and sovereign wealth funds. The Company’s platform enables the Company to offer active (alpha) investments with index (beta) products and risk management to develop tailored solutions for clients. Its product range includes single- and multi-asset class portfolios investing in equities, fixed income, alternatives and/or money market instruments.

BLK is the world’s largest asset manager, with over $4.3 trillion under management. Most people are familiar with BLK through its iShares ETF product line.

Since I’ve never analyzed BLK on this blog before, let’s quickly scan through our our criteria:

• Pays a dividend: Yes
• Has 5+ years of dividend increases: Yes (5 years)
• Has not frozen dividend for over 8 quarters: Yes
• Has a Chowder number of 12 or more: Yes (18.7)
• Has am EPS payout ratio of less than 70%: Yes (39.92%)
• Pays a dividend monthly or quarterly: Yes (Quarterly: March, June, August, November)

• Has an S&P Quality Ranking of ‘A-‘ or better: Yes (A)
• Has generally increasing earnings over the past 10+ years: Yes
• Is fairly valued/undervalued according to the Normal P/E ratio (blue line): Yes
• Is fairly valued/undervalued according to the Intrinsic P/E ratio (orange line): Yes

Investment Thesis:

Well, as I’m sure you know, BLK is not a standard choice for most dividend growth investors. When I took a look at the company, three things jumped out at me:

1) Dividend history – Yes, I said BLK has only raised for 5 years. But don’t forget about the financial crisis. BLK held its dividend constant in 2008 and 2009, even when stalwarts like STT, WFC, and BAC were cutting or eliminating their dividends completely. More importantly, BLK has never cut its dividend since the first payout in September 2003. That is a rare feat, especially for a financial company. If they can maintain the dividend even through one of the worst financial crises in history, I certainly think it’s worth adding to my dividend growth portfolio.

2) Wide moat – Since Morningstar could say it better than I ever could, let’s just take a look at their thought process here:

The publicly traded asset managers tend to have economic moats, with switching costs and intangible assets being the most durable sources of competitive advantage for firms in the asset-management industry. Although the switching costs might not be explicitly large, the benefits of switching from one asset manager to another are at times so uncertain that many investors take the path of least resistance and stay where they are. As a result, money that flows into asset-management firms tends to stay there …

Although the barriers to entry are not significant for the industry, it takes time and skill to gather the level of assets necessary to build scale. … Asset managers offering niche products with significantly higher switching costs–such as retirement accounts, funds with lockup periods, and tax-managed strategies- have also been able to hold on to assets longer.

BlackRock, in our view, has a wide economic moat around its operations. The size and scale of its operations, the strength of its brands, and the diversity of its AUM by asset class, distribution channel, and geographic reach provide it with a leg up over competitors. BlackRock is the largest asset manager in the world, with $4.525 trillion in total AUM, and a product mix that is fairly diverse … Product distribution is weighted more heavily toward institutional clients … These types of clients have traditionally been much stickier than individual retail investors. The company remains geographically diverse as well, with clients in more than 100 countries and close to 40% of its total AUM coming from investors domiciled outside of the United States and Canada.

Another key differentiator for BlackRock has been its commitment to risk management, product innovation, and advice-driven solutions. … [T]he company has developed tools to assess both security- and portfolio-level risks, which it not only uses internally but offers to external clients for a fee. This has also enhanced the firm’s ability not only to roll out new products, but also combine existing products to create outcome-based investment offerings.

[W]e also highlight the success that BlackRock has had with its insistence on one common culture, focused on one shared vision and operating on one platform, even as it has made several transformational deals over the past decade. We also think BlackRock’s ability to generate more stable cash flows than most of the other publicly traded asset managers has allowed it to continuously reinvest capital back into its business (especially in regards to technology and new products), making it that much harder for smaller (and weaker) competitors to compensate.

3) Strong management – Also from Morningstar:

Larry Fink has been chairman and CEO of BlackRock since the company first went public in 1999, having run the entities that would eventually be formed into the asset management firm since 1988. Fink’s exceptional leadership has been the driving force behind much of BlackRock’s success. In an industry where acquisitions have not always worked out well, Fink has overseen not one but two major deals–Merrill Lynch Investment Management (2006) and Barclays Global Investors (2009)–that completely transformed the company, turning it into not only the largest asset manager in the world, but also the one with the widest moat in our coverage. …

Another reason that BlackRock has had success where so many have failed is that Fink has insisted on one culture at BlackRock. We’ve found that asset managers with a single corporate culture dedicated to a common purpose (which is ultimately reflected in the level and consistency of investment performance, the rate of organic growth, the focus and importance placed on risk management, and the amount of employee turnover) have tended to have much wider economic moats over the long run than companies operating with less cohesive or inconsistent organizations, and BlackRock has epitomized this view.

We continue to be impressed with efforts the firm has made to broaden the scope of its senior management team, and potentially groom successors for Fink and the company’s president, Robert Kapito, by moving key personnel around into different management roles.  …

BlackRock started revamping [underperforming] operations in 2012, bringing in new managers and introducing different ways of processing and organizing their investment teams. This has led to improved performance in BlackRock’s actively managed fixed-income and equity platforms, which has put these offerings in a better position to generate positive flows.

Sorry for the walls of text, but there’s a lot of good points in there. If there are so many good things about BLK, why wouldn’t I put my money where my mouth is and buy a few shares?

This purchase will add $23.16 to my annual dividend income. Since my tax bill will be significant this year. I think this will be my last purchase until April. Gotta save money and give the IRS its due. See you around!

Have you gotten a dividend-paying present for yourself this holiday season? 

Disclosure: Long BLK, WFC. My portfolio page and watchlist have been updated accordingly. Please read my disclaimer here before choosing to invest. Image source is available here.

Tags: BlackRock Inc, BLK, stock-purchase