Think back to a time when you were discussing the performance of an investment with someone.
Whether it was your own investment or the other person’s investment, or even a friend of a friend’s brother, it really doesn’t matter. I am willing to bet that the conversation was centered on the outstanding increase in value (either realized or unrealized).
When discussing investments, most people like to focus on the positive and don’t talk too much about their investments that are losing money.
Therefore, I thought it would be an interesting exercise to take a closer look at one of my losing positions and determine if the stock still meets my dividend growth investing portfolio guidelines.
Today we will take a look at Franklin Resources, Inc. ($BEN)
About Franklin Resources, Inc.
Franklin Resources, Inc. is an asset management holding company that operates as Franklin Templeton Investments and provides investment management and related services to individuals, institutions, pension plans, trusts, and partnerships. The firm invests in the public equity, fixed income, and alternative markets.
The company was founded by Rupert H. Johnson Sr. in 1947 in New York. He named the company after Benjamin Franklin because Franklin epitomized the ideas of frugality and prudence when it came to saving and investing money.
Franklin Resources is headquartered in San Mateo, California.
DGI Portfolio Guidelines
At the close of the market today, my position in $BEN is in the red by 3.79% with a cost basis of $33.74/share and a closing price of $32.46/share. The stock is trading 8.38% off the 52-week low of $29.95/share.
Let’s see how Franklin Resources matches up with my portfolio guidelines:
- P/E Ratio: With a current price of $32.46 and forward earnings of $3.16/share, BEN is trading at a P/E ratio of 10.27–well below my target of the overall S&P 500 market index P/E.
- Increasing Dividend: Franklin Resources easily surpasses my guideline for a minimum of 5-10 years of dividend increases with their 38-year history of rising dividends.
- Dividend Growth: I look for dividend growth greater than 6% over the last one, three, five, and ten year periods and BEN checks all of the boxes here with strong growth (details shared below).
- Payout Ratio: My guideline is to look for a payout ratio below 60-65% and BEN has a very conservative payout ratio of 29.1% which leaves considerable coverage for their dividend in the face of earnings pressure.
- Dividend Yield: Based on the closing price today, their dividend yield is 2.83% and that is above my 2.5% target.
- Beta: The current beta is 1.45 and that lands above my desired guideline of 1.0, which means this stock tends to be more volatile than the market.
To highlight the strong dividend growth that Franklin Resources has delivered, take a look at the results here:
Outlook Moving Forward
Based on my DGI portfolio guidelines, Franklin Resources checks all of the boxes and continues to meet my criteria with the exception being the beta that is higher than the market.
However, simply checking all of the boxes doesn’t necessarily provide the full picture.
Franklin Resources is an asset manager and with more and more people beginning to manage their own investments with low-cost index funds, that has been having an impact on their bottom line.
Their assets under management (AUM) as of August 31, 2018 was reported at $722.4B compared to $747.4B year-over-year and down from $733.7B in the prior month. Month over month, they were down in total equity AUM, multi-asset AUM, and fixed-income AUM while cash management AUM had a slight increase.
Despite the downward trend in AUM, Franklin Resources carries very little debt with total liabilities of $3.3B compared to over $6.4B in cash. This puts them in a very interesting spot where they have the ability to weather a declining business while continuing to grow their earnings per share and/or dividend.
Lastly, as a dividend investor, Franklin Resources is appealing because they occasionally pay a special dividend as they did earlier this year with a $3.00/share payout.
Wrapping Up
Overall, while I have lost ~4% from my purchase price, I still believe that Franklin Resources will continue to provide an attractive dividend and maintain their impressive dividend growth.
I am prepared for the stock price to be volatile, and will watch for that to provide opportunities to nibble more shares. I am a little hesitant to go too strongly as I believe the next bear market will be a significant blow to their price. However, a 38-year history of dividend increases demonstrates that they have weathered a few bear markets.
Right now I am content to hold but if the price returns to levels near $30.00/share I will be looking to add a little.
What do you think of Franklin Resources and/or my analysis?
I can’t speak to the stock directly, but we all make tough investments that don’t always meet expectation. I wonder if asset managers are in secular decline? Will they be like tobacco and perform well or like other industries that just can’t make it like cameras and film? Not sure, but always good to reassess. Tom
I’d lean towards the former, as I believe there will always be people that want their money managed for them–but the test will be whether they can stand apart with their performance. Franklin actually has a decent track record of performance, or at least has in recent past.
DivvyD –
Great eval and something you should always consider on stocks you hold – see if they still fit the strategy and goal.
-Lanny
Thanks Lanny, definitely agree and figured it was time to share a post on the process that I tend to go through on a regular basis for my holdings.
BEN is an interesting stock, DivvyDad. I was in, and then out, in 2015. I didn’t fare too well with my foray into the stock back then. I bought at ~$51, then more at $43, before deciding to sell it all at ~$39. It was just 6 months from entry to exit.
At the time, the price trend for BEN was down, it seemed to be faring less well price-wise than other asset managers, and I wasn’t sure when the slide would end, so I sold. Given that it’s 3 years later and BEN is trading at ~$33 it looks like it was the correct decision for me. The day I sold BEN was the same day I replaced it with Blackrock (BLK). Thus, it’s turned out to be a good switch.
I was intrigued by BEN’s dividend history back then, and as you highlight that continues to look good, along with some other dividend metrics. However, revenues have been on a downward trend since 2014, and that is a concern. Earnings have been down since 2014 as well, before a tick up in 2017.
Given how well the stock market as a whole has done in the past few years, the price performance that BEN has produced over that same time period is disappointing. Hopefully, BEN can get revenues and earnings moving up again, and the stock price will follow. While you hold it, definitely challenge BEN with some other asset managers, or even some other financials.
As I re-read this comment, it sounds a bit critical, but please note that is not my intention. I just wanted to share a couple of thoughts for potentially factoring into your evaluation of BEN.
Thanks for sharing your thoughts on a losing position within your portfolio. I agree we need to discuss the poorer performers, too.
Thanks for sharing your thoughts and experiences with BEN, and by no means did I take the comment to be critical as I think this type of dialog helps us all be better investors.
The declining revenues and earnings have me quite cautious on this one, as without those concerns I likely would have already added some more. On the flip side, their payout ratio is still quite low–although if looking at their payout based on FCF that has taken a much bigger jump up and that is a red flag to me.
I’ll be keeping a shorter leash on BEN than I would on some of the others, but will start to evaluate them against others–and it is nice that your move away from them and into Blackrock worked out so well for you!
Grest to see you evaluating a loser, refreshing! I’ve had my eyes on BEN for a while since I don’t have any exposure to the financial world so far. But I also see the years of decline as a red flag, convince that with the trend toward low cost vanguard and more DIY investors I don’t see how they can easily turn the ship around.
Thanks Mr. Robot, and they do have a tough road ahead of them. The other holdings that I have in the financial sector have more diversification beyond just assets under management (e.g. Prudential) but BEN is more focused. I’ll continue to hold for now but am watching them closely.