Blackstone: Diversified Business, Covered 3.5% Dividend, But Expensive (NYSE:BX)

Blackstone Inc. (NYSE:BX) is a profitable and internationally-diversified asset management company with multiple fee streams. The asset manager just reported earnings for its fourth quarter that exceeded expectations in terms of distributable earnings.

Blackstone has a solid history of growth under its belt and the company comfortably covered its dividend with distributable earnings throughout 2023.

I think that Blackstone’s 3.5% yield is nothing to sneer at, but the stock appears now quite expensive, selling for a 30x leading distributable earnings multiple. Consequently, I am modifying my stock classification to Hold.

My Rating History

My last review of Blackstone dates back to October 2023 which is when I slapped a Buy rating on the asset manager’s stock.

The asset manager is doing well in terms of raising capital from investors and the company’s assets under management well exceeded the $1 trillion mark.

Blackstone produced decent dividend coverage as well in 2023 and the stock pays a compelling 3.5% yield. With that being said, though, I think the valuation is a bit inflated here.

Earnings Beat

The asset manager surpassed expectations in the fourth quarter and produced a 16% profit beat. Blackstone’s 4Q-23 profits were $1.11 per share, as defined as distributable earnings, as opposed to a Street estimate of $0.95 per share.

Blackstone Is A Diversified Asset Manager With Multiple Income Streams

Blackstone provides management, advisory, and investment services for clients, mostly institutions and high-net-worth individuals. The investment company has developed expertise and a reputation in a number of industries, including Private Equity, Real Estate, Credit, and Hedge Funds.

Blackstone enjoyed a 4% increase in distributable earnings in Q4’23 and the asset manager remained highly profitable in 2023, despite earlier headwinds to deal-making activity.

In the fourth quarter, a 2% drop in fee-related revenues was offset by recovering strength in deal-making and the outlook for M&A in particular appears to be improving, based on a recent Deloitte survey. Realized performance revenues soared 47% YoY in 4Q-23, leading to 16% growth in net realizations.

In Total, Blackstone produced $1.39 billion in distributable earnings in the fourth quarter which, as we will see later, was more than sufficient to pay shareholders a healthy quarterly dividend.

Robust Growth In Assets Under Management

Blackstone remained highly successful in the fourth quarter in terms of raising capital for its client network. As one of the leading asset managers in the world, Blackstone is obviously a top address for investors, personal and institutional, to park their cash or put their money into one of Blackstone’s Private Equity, Credit or Real Estate investment vehicles.

Blackstone had more than $1 trillion in assets under management at the end of 2023, the majority of which related to fee-earning assets. Total AUM was up 7% YoY so even in a challenging market involving a series of bank failures and a Fed shift, Blackstone can raise a boatload of new assets.

Distributable Earnings Growth And Payout Ratio

Blackstone is diversified and produces income from four main fields of operations: Real Estate, Private Equity, Credit & Insurance and Hedge Fund Solutions. Blackstone’s distributable earnings, as of 4Q-23, came from Real Estate (36%), Private Equity (30%), Credit & Insurance (22%) and Hedge Funds (11%).

In the last year, Blackstone earned $3.95 per share in distributable earnings and paid an average dividend of $0.99 per share per quarter, reflecting a dividend payout ratio of 85%. The dividend payout per quarter moved between $0.93 and $1.11 per share and the asset manager will pay a $0.94 per share dividend for the fourth quarter on February 12, 2024.

In 2022, Blackstone’s payout ratio, based on distributable earnings, was also 85%. I think the dividend has a moderate margin of safety, but one of the drawbacks of investing in Blackstone as a passive income investor is that the dividend paid each quarter is not predictable.

Blackstone Now Sells For A High DE Multiple

Blackstone earned $3.95 per share in distributable earnings in 2023. I think that the asset manager could see 4-5% growth in distributable earnings in 2024, with potential upside coming from a resurging M&A/deal-making business this year, which points us to a potential distributable earnings range of $4.10-4.15 per share that I think could be realistic.

At a present stock price of $124.57, Blackstone is selling for 30x distributable earnings which seems like a rather high multiple given the unpredictability of Blackstone’s earnings profile from quarter to quarter.

My estimate for KKR & Co. Inc. (KKR) 2023 distributable earnings was $3.20-3.25 per share which implies a distributable earnings multiple of 27x.

Making the equal assumption for 4-5% growth in 2024 earnings due to KKR’s comparable business setup, KKR’s distributable earnings multiple for 2024 would fall to 26x. Both asset managers at this point are not compelling Buys from a valuation perspective, in my view.

Headwinds To The Blackstone Investment Thesis

Asset managers with operations in unpredictable market segments like Private Equity or Real Estate are subject, at least temporarily, to a high degree of profit volatility which could put Blackstone’s stock on a bumpy ride.

The dividend is covered by distributable earnings at the present time, but an exceptionally bad quarter in the stock market may change this.

My Conclusion

Blackstone is a top asset manager with multiple, diversified fee streams that produce recurring revenue and income for the company and its shareholders.

Blackstone is successful in raising capital and its assets under management kept going up in the fourth quarter, AUM now handsomely exceeds $1 trillion.

The company’s distributable earnings increased 4% YoY and Blackstone paid out 85% of its distributable earnings in 2023, the same amount as it did in 2022.

Blackstone’s dividend, however, after the stock has skyrocketed, is no longer cheap and the DE multiple of 30x indicates that investors are paying full price here for Blackstone’s profit potential. Hold.