BlackRock Hikes Dividend, Announces Share Repurchases After Strong Q4

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BlackRock

BlackRock (NYSE:BLK) managed to exceed investor expectations with its Q4 2014 results on Thursday, January 15, as lower operating costs made up for the shortfall in revenues for the period. ((4Q14 Earnings Release, BlackRock Press Releases, Jan 15 2014)) The world’s largest asset manager saw investors around the globe pour in $87.8 billion into its various offerings over the fourth quarter – a record for any quarter since the firm was founded in 1988. Improvements in valuation across asset classes helped the company’s asset base swell to an unprecedented $4.65 trillion despite negative foreign exchange movements in Q4. Notably, net inflows for full-year 2014 of $102.8 billion also represent an all-time high for BlackRock. ((BlackRock ETF funds draw record $102.8 billion in new money, Reuters, Jan 5 2015))

The quarter-on-quarter reduction in revenues can be traced almost entirely to a reduction in the fees BlackRock generated over the quarter from its active equity funds and equity iShares. Performance fees for the period were also weak compared to the extremely strong numbers seen in the year-ago period. However, BlackRock’s operating margins (GAAP basis) increased to an all-time high of 41.1% from 40.8% in Q4 2013 and 40.4% in Q3 2014. This is a commendable performance, as low-cost ETFs (which carry a very small fee component) remain the primary source of growth for the company – indicating that the margin gains came from stricter expense management by the company.

The record inflows across iShares offerings, the company’s continuing focus on managing costs, as well as the recently announced decision to return more cash to investors by hiking dividends and by buying back an additional 6 million shares, led us to increase our price estimate for BlackRock’s stock upwards from $355 to $360. The new price target is about 5% ahead of the current market price.

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See our full analysis for BlackRock

BlackRock’s Business Model Now Built Around iShares

Since BlackRock acquired iShares from Barclays Global Investors in late 2009, the investment product has seen the fastest growth among all that the company has to offer. The company is the undisputed leader in the ETF industry, with its $1 trillion asset base representing a market share of nearly 40%. Net inflows across BlackRock’s iShares offerings were $44.4 billion for Q4 2014 – a little more than half of the company’s total inflows for the period. It should be noted, however, that the fixed income iShares benefited considerably from clients shifting a bulk of their cash from rival PIMCO’s fixed income funds in October. Notably, the only fund category that witnessed a net outflow of cash for the period was BlackRock’s active equity funds, which lost a little over $7 billion.

The ETF growth story has generated huge profits for BlackRock, with revenues from iShares (fixed-income and equity combined) reaching $812 million for the fourth quarter – 34% of the $2.4 billion in fund-related fee revenues for BlackRock, and a little over 29% of its total revenues of $2.8 billion. Even if the company made a conservative $30 million from its multi-class asset and commodity iShares (revenues for which are not reported separately), iShares revenues were easily responsible for well over 30% of the company’s total revenues for the period. A better idea of the importance of iShares in BlackRock’s business model is demonstrated by the fact that this revenue share is achieved despite ETF assets forming just a little over 23% of the company’s total long-term asset base of $4.3 trillion. The higher revenue potential from iShares compared to passively-managed funds explains this discrepancy and is something BlackRock will be looking to capitalize on to grow its top line in the future.

BlackRock Is Keeping A Sharp Eye On Its Expenses

We have detailed the importance of cutting costs for BlackRock on several occasions in the past, especially given its shifting focus on the retail investor market. This is because the largely untapped retail investor market is heavily influenced by the price of the products offered – requiring BlackRock to keep its fees from these products low. The company’s efforts to rein in costs have made a tangible impact on the bottom line over recent quarters. BlackRock reported operating expenses of $1.64 billion in Q4 2014 – almost identical to the figure a year ago and 3% below the $1.69 billion in Q3 2014. This helped operating margins increase to an all-time high of 41.1% for the quarter. On an adjusted basis, the operating margin was 43.6% – slightly below the 44.2% figure seen in the previous quarter. The quarter-on-quarter decline in adjusted operating margin can be attributed to the higher revenue figure for Q3 2014.

The chart below captures BlackRock’s historical operating margin as well as our operating margin forecast for the company. While expenses are likely to grow steadily in the future as a result of the company’s plans to expand its operations geographically, we believe that revenue growth will outpace the rate at which expenses will grow over coming years. This will result in a steady improvement in operating margins for BlackRock. As you can see by making changes to this chart, an increase of just two percentage points in margin figures by the end of our forecast period would push our price estimate up by more than 5%.

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