The Battle of the Bankers: BEN vs TROW

One of the few companies left on my watchlist in the financial sector is Franklin Resources (BEN). I first heard about the company late last year, around the time Dividend Growth Investor wrote his article on BEN. After I purchased BLK, I thought BEN would be the other asset manager I’d add, and that’d be it. But recently there’s been some hubbub about another asset manager, T. Rowe Price (TROW). This is a company that I’ve never followed before, but a lot of people seem to like (see Dividend Mantra’s analysis here for an example). Based on what I’ve seen, TROW has a lot to like as well. High dividend yield, no debt. And most importantly, a juicy $2.00/share special dividend in April! Both stocks look appealing in their own ways. Sadly, I can only own one. Which one’s better? Let’s find out. Welcome to the “Battle of the Bankers” 2015!

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The Contestants:

BEN:

Franklin Resources, Inc. (Franklin), is a holding company. Franklin together with its various subsidiaries (collectively, the Company), is referred to as Franklin Templeton Investments, is a global investment management organization offering investment management and related services under the Franklin, Templeton, Mutual Series, Bissett, Fiduciary and Darby brand names. It provides services to investment funds in jurisdictions globally, which include the United States- and non- United States-registered open-end and closed-end funds, unregistered funds, and institutional, high net-worth and separately-managed accounts. The Company’s investment management and related services include fund administration, shareholder services, transfer agency, underwriting, distribution, custodial, trustee and other fiduciary services. Its sponsored investment products include a range of equity, hybrid, fixed-income and cash management funds and accounts, including alternative investment products. [from Scottrade]

TROW:

T. Rowe Price Group, Inc. is a financial services holding company that provides global investment management services through its subsidiaries to individual and institutional investors in the sponsored T. Rowe Price mutual funds, investment portfolios, sponsored investment portfolios, and portfolios offered through annuity life insurance plans in the United States. The Company derives their revenue and income from investment advisory services provided by its subsidiaries, T. Rowe Price Associates and T. Rowe Price International Ltd. The Company’s advisory services include management of stable value investment contracts and a distribution management service for the disposition of equity securities its clients receive from third-party venture capital investment pools. The Company also provides certain administrative services as ancillary services to its investment advisory clients which include mutual fund transfer agent, accounting, distribution, shareholder services and other services. [from Scottrade]

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Round One: Basic Criteria:

I’m guessing you all know my screening criteria by heart at this point, but if not, here you go.

BEN

• Pays a dividend: Yes
• Has 5+ years of dividend increases: Yes (35 years)
• Has not frozen dividend for over 8 quarters: Yes
• Has a Chowder number of 12 or more: Yes (12.5)
• Has am EPS payout ratio of less than 70%: Yes (16.04%)
• Pays a dividend monthly or quarterly: Yes (Quarterly; January, April, July, October)

• Has an S&P Quality Ranking of ‘A-‘ or better: No (B+)
• 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

TROW

• Pays a dividend: Yes
• Has 5+ years of dividend increases: Yes (29 years)
• Has not frozen dividend for over 8 quarters: Yes
• Has a Chowder number of 12 or more: Yes (14.5)
• Has am EPS payout ratio of less than 70%: Yes (46.74%)
• Pays a dividend monthly or quarterly: Yes (Quarterly; March, June, September, December)

• 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): No
• Is fairly valued/undervalued according to the Intrinsic P/E ratio (orange line): Yes

Winner: Tough call here, isn’t it? BEN wins in the payout ratio, dividend growth streak, and valuation criteria. TROW wins on Chowder number, quality ranking, and earnings growth. Now at this point, I could both say they are good investments, and call it a day. But that’s no fun. Now, personally, I value quality rankings, earnings growth, and the Chowder rule most highly. Heck, I sold Nucor because of them.  So to me, although it is a bit more fairly valued than BEN, I am giving this round to TROW.

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Round Two: What Others Think

BEN

• S&P Capital IQ: 4-star Buy
  • Scale is 1-5, 1 being ‘strong sell’, 5 being ‘strong buy’
• Thompson Reuters StockReport: 6 (optimized score of 4)
  • Scale is 1-10, 10 being best, 1 being worst
  • Optimized scores weight insider trading and price momentum heavier than other criteria
• Morningstar:
  • Moat: Wide
  • Stewardship: Standard

TROW

• S&P Capital IQ: 4-star Buy
  • Scale is 1-5, 1 being ‘strong sell’, 5 being ‘strong buy’
• Thompson Reuters StockReport: 10 (optimized score of 9)
  • Scale is 1-10, 10 being best, 1 being worst
  • Optimized scores weight insider trading and price momentum heavier than other criteria
• Morningstar:
  • Moat: Wide
  • Stewardship: Exemplary

Winner: Now honestly, I don’t really put much weight on this section in general, with the exception of Morningstar rankings. However, TROW has a much higher StockReport score and a better stewardship rating, so this one goes to TROW.

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Round Three: Financials:

Dividends:

BEN has a dividend yield of 1.16%. The company pays out $0.15/share quarterly, $0.60 annually. Though this may not seem like much, do note that BEN loves to pay out special dividends. Here’s a quick list of recent special dividend payouts:

• 01/2015: $0.50 ($1.50 split-adjusted)
• 12/2012: $3.00
• 12/2011: $2.00
• 12/2009: $3.00

Those are quite nice chunks of change, and I like the fact that BEN pays them. To me, it shows prudence with capital allocation, especially in down years. There’s less dividend obligations, which frees up capital for solid acquisitions, buybacks, or paying down debt when needed. However, at the same time, I am not too fond of that. As someone who wants to retire early, I want predictability of income as much as high income. BEN may or may not pay those special dividends, and if it’s a year they don’t, my income is that much lower.

TROW, on the other hand, has a current dividend yield of 2.56%. The company pays $0.52 quarterly, $2.08 annually, over triple BEN’s payout. And interestingly, TROW is no stranger to special dividends either. The upcoming $2.00 one aside, TROW paid a $1.00/share special dividend back in 2012. It seems that TROW chooses to pay out more cash in general for normal dividends, at the expense of high and frequent special dividends. Depending on your purposes and goals as an investor, that may or may not be a good thing. But for me, it’s easier to plan around stable income rather than special dividends, so I prefer TROW’s policy a bit more.

Payout ratio:

• BEN: 16.04%
• TROW: 46.74%

FCF payout ratio (dividends / FCF, both per share):

• BEN: $0.51 / $3.75 = 13.6%
• TROW: $1.76 / $4.35 = 40.45%

Debt:

• BEN: 0.2 debt/equity ($1.198 billion of debt)
• TROW: 0.0 debt/equity (debt-free)

Share repurchases:

• BEN: Net reducer: (682.17 million in 2010, 621.83 million today)
• TROW: Slight net issuer (259.42 million in 2010, 260.73 million today)

Splits:

• BEN: 3:1 split in 2013, 2:1 split in 1998, 3:2 split in 1997
• TROW: 2:1 in 2006, 2:1 in 1998, 2:1 in 1996

I think TROW takes it slightly, due to being debt-free and having a higher, more consistent dividend. I love BEN’s share buybacks and frequent special dividends though.

Winner: TROW

 

Metrics: 

P/E: 14.2 for BEN, 18.6 for TROW

One-year forward P/E: 13.1 for BEN (slight earnings growth), 14.6 for TROW (also indicates earnings growth)

Gross margin: Unknown for BEN and TROW

Operating margin: 37.76% for BEN, 47.49% for TROW

Net profit margin: 28.20% for BEN, 30.88% for TROW

Winner: TROW

 

Future Projections: 

BEN has 4.9% earnings growth over the next three years, with a total rate of return of 30.10% over the same time frame.

TROW has 11.1% earnings growth over the next three years, with a total rate of return of 22.86% over the same time frame.

Since BEN is much more undervalued than TROW, it stands to reason that BEN will have a higher rate of return, should both revert to a standard P/E ratio of 15. TROW’s projected earnings growth is much better though, as also indicated by the one-year forward P/E ratio. As I said above, I don’t care much for estimates, but earnings growth is more important to me.

Winner: TROW

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Other Notes

Like many other asset managers after the Great Recession, BEN has done a fantastic job increasing its assets under management (AUM). In 2010, BEN managed $644.9 billion; in 2014, that number was $898.0 billion. The CAGR of 8.62% is very solid growth, and nothing to be worried about. BEN is very internationally focused: “more than half of its AUM [are] invested in global/international strategies, and one third of managed assets [are] sourced from clients domiciled outside the U.S”. The company does on-the-ground research in 20 countries, and has trading desks in 12. I am a little uncomfortable with the founding Johnson family still owning a majority of the shares. Yes, they are willing and able to protect their company and their wealth, but I find that family-owned companies are often resistant to change since control is so concentrated. The current CEO is the son of the company’s founder, for example.

Something I found interesting is that the company’s culture is generally siloed. I actually view that as a good thing, since although each portion of the company shares administrative resources, they are allowed to hire and fire independently, which allows for skill specialization and shared knowledge and aptitude. To wit:

While the firm’s growth through acquisition has opened it up to potential cultural and managerial conflicts, Franklin prefers to use a hands-off approach to running its different investment franchises. Each of the fund families shares compliance, call centers, and other administrative capabilities with the parent, but is solely responsible for the hiring and training of its own personnel. This has allowed them to maintain control over their investment disciplines, while benefiting from the scale advantages of Franklin’s overall operations.

Source: Morningstar analyst report (PDF)

TROW has also done quite nicely in the post-Recession world, growing its AUM from $482.0 billion in 2010 to $746.8 billion in 2014. That yields a CAGR of 11.57%, better than BEN’s. That makes sense, as BEN has a much larger market cap ($32.2 billion) than TROW ($21.3 billion), implying that TROW is smaller and a faster grower. The company has seen strong growth from target-date retirement funds, signifying TROW is following the trend from active-managed funds to more passive funds. In five years, AUM invested in target-date funds has tripled from $43.7 billion to $142.4 billion.

Morningstar is very complimentary of management:

T. Rowe Price is unique among the asset managers we cover in that it has traditionally been run by a group of top officers (the management committee) who consult one another before making major decisions. … The management committee, which is responsible for guiding, implementing, and reviewing major policy and operating initiatives, has, in our view, done an exemplary job over the years. Capital allocation has been prudent, with the company carrying little to no debt on its books, engaging in very little acquisition activity, and tending to return cash to shareholders in the form of share repurchases and dividends. In the asset-management industry, debt can be a net negative, as was seen during the 2008-09 financial crisis when several firms that were carrying larger levels of debt had to scramble to raise capital (including issuing additional equity) after seeing revenue and profitability drop dramatically in response to the market decline. Compensation has tended to be reasonable, with executive pay being in line with most of the larger asset managers we cover. The one issue we do have is that T. Rowe Price has been a heavy user of stock options, which not only dilute existing shareholders but also blunt the impact of its share repurchase programs.

Source: Morningstar analyst report (PDF)

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Conclusion:

And the winner is … TROW! There were three rounds that BEN came very close to taking, but for my purposes, TROW is a slightly better investment. I have no doubt that BEN is a good investment, especially with the international focus. I also like the positives in family control in terms of safety of the dividend, though the centralization of control is also a negative. I’m considering leaving BEN on my watchlist for a much later purchase. However, in the places where it counts – the dividend, earnings growth, quality – TROW takes the cake. I also like TROW’s management, lack of debt, and shift to more passively-managed offerings. Ergo, although I feel that both are excellent investments, I will be swapping BEN for TROW on my watchlist. Hope I can buy it in time for that nice special dividend!

Which one would you prefer to buy? Or do you want to own both?

Disclosure: Long BLK

All data is accurate as of market close, 03/11/2015. My stock analysis archive page has been updated accordingly. Please read my disclaimer here before choosing to invest. Company logos belong to their respective companies. Data source is FAST Graphs, David Fish’s US Dividend Champions List, or company materials, unless otherwise indicated.

Tags: battle-of-the-bankers, BEN, dividend-stock-analysis, Franklin Resources Inc, T. Rowe Price Group Inc, TROW