Asset management firm Federated Investors (NYSE:FII) ended 2011 on a down note, but was able to support a dividend yield that is among the highest in its industry. An expected recovery in the stock market and expectations for higher interest rates should eventually boost profits and allow for a higher dividend payout over time. (For related reading, see Why Dividends Matter.)
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Total revenues declined around 6% to roughly $895.1 million as core investment advisory fees fell over 8% to account for 65.5% of the total top line. Administrative service fees advanced about 2% to make up nearly a quarter of revenues, but other service fees fell near 10% and accounted for almost 10% of the total pie. The small remaining portion of the top line stemmed from other revenue and grew approximately 6%.
Federated ended the year managing $30.9 billion in equity funds, and $44.8 billion in fixed income funds. Its money market business was much larger at $285.1 billion which, when combined with $8.9 billion in assets in the process of being liquidated, left $369.7 billion in total managed assets. This was up around 3% from $358.2 billion in 2010.
Total costs increased over 3% to roughly $376.9 million, with the negative sales leverage resulting in around a 17% decline in operating income to nearly $257.5 million. Net income fell by a similar amount, declining almost 16% to $150.9 million, or $1.45 per diluted share. During the year, the company paid out 96 cents of those earnings as dividends. (For additional reading, see How To Decode A Company's Earnings Reports.)
Recent Trends and Outlook
Federated has had a rough time since the credit crisis as both revenues and earnings are down more than 5% annually over the past three years. A key problem is the low interest rate environment. In particular, this is adversely affecting the short-term money market funds it manages. Given the extremely low yields that don't cover investment advisory fees, Federated took a pre-tax adverse impact of $81.9 million to ensure that fund yields do not fall below zero.
For 2012, analysts project modest revenue growth just north of 2% and total revenues of around $915.8 million. They currently expect earnings of $1.63 per share, which would represent annual earnings growth of more than 12%.
The Bottom Line
As one of the largest money market managers out there, Federated will continue to suffer more than other rivals that include Janus Capital Group (NYSE:JNS), Waddell & Reed Financial (NYSE:WDR), Legg Mason (NYSE:LM) and BlackRock (NYSE:BLK). However, unlike last year, its dividend payment is well-covered by profits and the current yield of roughly 5.6% is among the highest in the industry.
Other investment positives include a reasonable forward P/E of around 10.32 and the fact that Federated's results have a good chance of improving in the near future. The funds it managed are clearly influenced by global financial markets, which means that the equity funds it runs will benefit from higher stock market returns.
Its bond funds may suffer as interest rates are highly likely to rise going forward, but this will have a hugely beneficial impact on its money market funds. With any luck, earnings can return above $2 per share, with a corresponding increase in the dividend payout. (To learn more, check out The Evolution Of Money Management.)
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At the time of writing, Ryan C. Fuhrmann did not own shares in any of the companies mentioned in this article.