Monday, June 29, 2015

Invesco Ltd (IVZ) Dividend Stock Analysis

Hello,
As you may know, I recently ran my screen for July based on the following set of criteria:


Using David Fish’s CCC list:
  • Yield over Avg Yield > 1.10
  • Payout Ratio < 0.8
  • Chowder > 10
  • PE over Median PE < 1.0


Basically, the screen looks out for companies with lower than average P/E and higher than average yield. I also wanted a high Chowder to make sure that the company has enough dividend growth. Lastly, I further filtered out companies based on excellent (A) credit ratings.


You can see the list here:




Invesco Ltd (IVZ) showed up on the list. I am aware of IVZ due to the PowerShares QQQ ETF that it manages. However, Invesco is one of those companies that is normally not on my watch list because I usually screen for large companies with wide moat. Invesco manages just under $800B worth of assets. While this seems to be a large number, if you compare with Fidelity with $3 Trillion of managed assets, then Invesco is a relatively small player.


However after reviewing the company, I believe IVZ is a very good dividend growth stock for my portfolio.



Invesco Ltd (IVZ) Dividend Stock Analysis


Invesco Ltd (IVZ) is diversified investment manager that offers an array of investment options with $798.3 billion of assets under management at March 31 2015.


Investment management areas: real estate, distressed investing, bank loans, quantitative equity,fundamental equity, Fixed income, hedge funds, Fund of funds, environmental investing and ETFs.

Competitors: AMP, AMG, BEN, BLK, BK, TROW


Criteria List


IVZ 6/2015
Area
Criteria
CheckList
Comment
Quality Company
Dividend Growth
>5 years
Yes
6 Years
ROE/Op Margin
Stable
Yes
See Chart - Stable, but numbers low compared with competitors
Long term Avg Growth
Stable
Yes
See Chart
FCF over Dividends
Yes
Yes
FCF covers Dividends
M* Moat
Wide Moat
No
Narrow
M* & S&P
Credit Rating
> BBB+
Yes
A-
Cash to Debt & Interest Coverage, Debt to Equity
Cash Debt >1 or Interest Coverage > 5
Yes - but TTM Debt/Equity > 50
Cash to Debt 0.36
Interest Coverage 6.17
Debt to Equity 78.32
M* & S&P Stars
> 3 Stars for both
Yes
M* 4 Stars
S&P CapIQ 4 Stars
Payout Ratio
<60%
Yes
41.00%
Dividend Growth
& Yield
Dividend Yield
>3%
No
2.80%
Dividend Growth
>5%
Yes
21.00%
Chowder
>12%
Yes
23.80%
Valuation
Yield/Avg Yield
>1.1
Yes
1.17
Dividend Yield Theory Mid Point
Below Mid Point
Yes
Mid Point 51.27
Low Point 33
Median P/E
Below Mid Point
Yes
Median 16.05 Current 15.34
DRRM
~10%
Yes
Assuming 8% growth; projected return=10.4%
M* Estimate
<M* est
Yes
M* 45
S&P Estimate
< S&P cap IQ est
Yes
S&P Cap IQ 45


Note: data from M*, Yahoo, Gurufocus and CCC


Quality analysis


Years of Dividend raises


IVZ has 6 years of dividend raises. It has consistently provided a dividend since the mid 90s.
Stability of key metrics


These stability of the ratios provide an indication of moat & management strength. I am looking for overall stability (or even better - growth). If the ratios decline year over year, then this is an indication of moat reduction and poor management. I also compare these ratios with other companies within the same sectors.


The ROE is around 12% which puts it at above 73% of Global Asset Management industry.


If you compare with T-Rowe Price with its ROE at around 23%, IVZ is quite a ways behind. Also, the Operating Margin of IVZ is around 26% vs TROW at 47%. Therefore, I believe IVZ’s moat is narrow compared with the industry leaders.


However, the stability of the metrics is a good sign, meaning that the company is relatively stable.


Free cash flow over dividends  


I use the free cash flow per share and compare this with dividends per share. FCF should cover the dividends.


As you can see, the FCF easily covered the dividends for the last 10 years. This gives a good indication of continued dividend growth.


Average growth


Here, I look for the stability of growth indicators over ten years using the EPS and Revenue.
The EPS and revenues took a dive from 2008 and 2009. However, from 2009 until now, the growth has been excellent.


EPS Analysis

It is good to review the actual earnings and number of outstanding shares to see exactly how the EPS grows.


As you can see, the EPS is mostly correlated with the earnings. There was a rise of shares from 2008 to 2010, and then a reduction of shares from 2010 to 2014. Overall, the share dilution and buyback didn’t impact the EPS trend significantly.


EPS and Price


Eventually, a lack of earnings over a long period of time will drive a stock price down and the company potentially out of business. On the other hand, a rising EPS will have a positive impact on price.




Visually, I can see a tight correlation with EPS and price. From a dividends stock perspective, a growing EPS is important for continued dividends growth.


Overall, the EPS has been growing since 2009.


S&P Capital IQ 3-Yr. Projected EPS CAGR(%) is around 15% which is a good sign for dividend growth (as well as price appreciation - which is a secondary requirement for me).


3Y Growth from GuruFocus
Revenue Growth (3Y)(%)
10.3
EPS Growth (3Y)(%)
13.2


M* Moat


I simply use the moat indicator from M* to validate my findings.  M* indicates that IVZ has a narrow moat.  Another indicator of moat, in addition to margins and ROE is the ROIC.


With the ROIC in the single digits, IVZ’s moat is narrow. Per Morningstar, Invesco’s narrow moat is mostly due to the the lack of consistency in the firm's profitability due to the decentralized
nature of the firm's operations, which prevented Invesco from developing a common, scalable global platform for its brands, limiting its ability to gather and retain assets and diminishing many of the scale advantages that come with running an asset-management business.


Credit rating


Here, I look for companies with credit rating of BBB+. Just like banks wanting good credit from you when you apply for a loan, you want companies which are stable from a credit perspective.


IVZ’s credit rating from M* is A- which is a good indication of the security of the company.


Debt


I look at the debt to equity ratio (<50) and cash to debt (<1) and interest coverage (>5). Sometimes, a little good debt is good for a business. But too much debt can be a burden.


IVZ’s Cash to Debt 0.36 with Interest Coverage at around 6.17 which means the debt can be covered. (The threshold is 5) The TTM Debt to Equity is around 78.32  which is above my 50% threshold.


However, over the last 10 years, the debt to equity ratio is mostly well controlled between 2006 and 2010. The ratio is relatively high between 2011 and 2013. Last year, it is around 0.23.


So, this is something to monitor in the future.


M* and S&P capital IQ rating


I am looking for 3 stars and above from either. A four/five star is a bonus.  
M* gives IVZ 4 Stars and S&P CapIQ gives 4 Stars
IVZ combined stars is 8 - which means it is a good indication to buy.


Dividend Yield and growth
  • Dividend yield is 2.8% which is slightly below my threshold of 3%.
  • 5Y CAGR dividend growth is 21%  which is higher my threshold of 5%.
  • Chowder is around 23.8% which is below my 12% threshold.
IVZ median dividend growth YoY is around 10% for the last 10 years (with the dip in 2008/2009).
Payout Ratio
The TTM payout ratio for IVZ for the recent quarter is around 41% which is below the threshold of 60%.  For the last ten years, IVZ has a payout ratio under 50%.
While the dividend may be frozen during recession years, I believe IVZ’s payment of dividends will be safe based on the dividend history and payout ratios.


Value analysis


Average yield


The current yield per average yield for 5 years ratio is 1.17. I use this as a quick indicator for valuation.This basically means that IVZ’s current yield is 17% over the average yield - which is a good sign for valuation.


Dividend Yield Theory Mid Point


Using the dividend yield theory spreadsheet (based on the Dividends Don't Lie book), I calculate the mid and high points for the yield, from which I derive the price.  


I estimate the high and low yields to be:


High
3.20%
Low
1.50%


Which produces the high and low boundaries.




This gives the following high, mid and low price ranges.


High Price:
69.81
Mid Price:
51.27
Low Price:
32.73


IVZ’s current price is around 37-38 which means it is between Mid and Low price range.


P/E Analysis


I can also estimate the fair value using the high and low earnings multiples based on the article and spreadsheet: http://div4son.blogspot.com/2015/06/using-pe-for-dividend-stock-valuation.html


I estimate the High and Low Earnings multiple to be:


High P/E
23.10
Mid P/E
16.70
Low P/E
10.30


Which gives an estimation of the price lines:
High Price
56.36
Mid Price
40.75
Low Price
25.13


The median and current P/Es are:


P/E 5 Yr Median
16.05


Current P/E
15.34


With the current price around 37-38, the P/E analysis is indicating that IVZ is trading slightly below fair value.


Dividend Drill Return Model
Also, using the DDRM model per the Dividend Playbook, I try to estimate the total return. Using the growth information from above, I estimate a conservative growth rate of 6%. (The 3yr CAGR EPS from S&P Capital IQ is 13%. I used a conservative 8% estimate below).


DDRM

Dividend Rate ($)
1.05
Divided by: share price
37.4
Current yield (%)
2.80
Core Growth Estimate (%)
8.00
Divided by: ROE (%)
12.72
Multiplied by: EPS ($)
2.44
Cost of Growth (%)
1.53
Earnings per Share ($)
2.44
Minus: Dividend
1.05
Minus: Cost of Growth
1.53
Funding Gap ($)
-0.14
Divided by: Share Price ($)
37.4
Share Change (%)
-0.38
Core Growth (%)
8.00
Plus: Share Change (%)
-0.38
Total Dividend Growth (%)
7.62
Plus: Dividend Yield (%)
2.80
Projected Total Return (%)
10.42


IVZ’s projected total return is 10.42% which is around my 10% threshold.


Rearranging the numbers based on the dividend growth & 8% growth:


Dividend Rate ($)
1.05
Required Return (%)
10.00
Growth (%)
7.62
Price
44.02


Dividend Rate ($)
1.05
Required Return (%)
10.00
Growth (%)
8.00
Price
52.36


The average is around $48.


M* and S&P valuations


Morningstar gives IVZ a target of $45. S&P capIQ gives a target of $45. Therefore, with a current price around ~37-38, IVZ is fairly priced.


Note: The whole point of all the valuation is to get a ballpark estimation. I estimate a fair value of in the mid $40s..


Risks
  • Invesco is relatively small compared with the top 3 Asset Managers. From this perspective, they may be treated as a 2nd tier Asset Manager
  • Invesco continues to trail peers on a profitability basis
  • The above two points may be disadvantageous in a down market


Conclusion


Per my June update, I wanted to rebalance my other sectors other than consumer goods. Moreover, I wanted to add a secondary company to TROW. I think IVZ fits the space nicely. It is slightly outside my domain (e.g. usually I look for large moat companies, high ROE, dividend growth >10 years) but the growth metrics (EPS & dividend growth) are very decent.


From a price perspective, I believe the current price (in the ~37-38s) is very reasonable compared with my estimate in the mid 40s.

I recently added 45 shares of IVZ at $37.7 which should add around $48.60 to my forward dividends.


That's it for all. What do you think of Invesco?


D4S

No comments:

Post a Comment