Brookfield Asset Management: Buying More Of This Dividend Grower Now (NYSE:BAM)

As my investment philosophy, I believe in picking quality businesses operating in industries with trends on their side. That is because, over the long run, such companies tend to deliver revenue and earnings growth.

The global alternative asset management industry is one industry that appears to have appealing growth potential. Preqin is the world’s leader in alternative asset data and tools. The firm expects global alternative AUM to jump from $16.3 trillion to conclude 2023 to $24.5 trillion at the end of 2028. That would be an 8.5% compound annual growth rate.

I continue to believe that Brookfield Asset Management (NYSE:BAM) will be one of the biggest beneficiaries of the industry’s ongoing growth trajectory. When I last covered the company with a buy rating in February, there were several reasons that I liked BAM. These included a growing fee-bearing capital base, the 18.8% dividend hike announced that month, an A-rated balance sheet, and a valuation trading near fair value.

Earlier today (May 8), BAM shared its financial results for the first quarter ended March 31. Briefly, the company’s fee-bearing capital grew year-over-year and sequentially. BAM also recently closed on deals that can power fee-bearing capital growth moving forward. The company’s net cash position also remained very healthy. Lastly, my fair value estimate of BAM’s shares has grown in recent months.

Making The Right Moves To Renew Growth

BAM’s results weren’t flashy in the first quarter, but they were enough for me. The company’s total revenue decreased by 16.1% year-over-year to $884 million during the quarter. That was short of the $1.13 billion analyst consensus per Seeking Alpha.

For context, these results weren’t because of any mistakes on the part of BAM. The company’s fee-bearing capital grew by 6.3% over the year-ago period to $459 billion as of March 31. Sequentially, fee-bearing capital was up 0.4% from $457 billion as of Dec. 31, 2023. According to BAM’s CFO Bahir Manios during the Q1 2024 Earnings Call, this growth in fee-bearing capital was offset by lower permanent capital vehicle fees and transaction fees.

Despite the company’s lower revenue base, its distributable EPS was flat at $0.34 for the first quarter. That matched the analyst consensus per Seeking Alpha.

Lower total expenses and income tax obligations helped the company’s non-GAAP net profit margin expand by nearly 850 basis points to 61.9% in the quarter. That is how distributable EPS remained unchanged as total revenue dropped.

Looking forward, there are a few catalysts that should help BAM return to growth in the quarters ahead. The FAST Graphs analyst consensus of $1.47 for 2024 would imply $1.13 in distributable EPS for the remainder of the year. This would be a 9.7% growth rate over the $1.03 in distributable EPS logged in Q2-Q4 2023. I believe this is a reasonable growth forecast for several reasons.

First, BAM posted $20 billion of capital during the first quarter, with $10 billion coming since the last earnings release on Feb. 7. This will be a boost to fee-bearing capital in the quarters ahead.

Second, the company completed a $50 billion asset management mandate with American Equity Investment Life shortly after the first quarter. This will contribute to at least an additional $500 million in annualized base fee revenue once placed.

Additionally, President Connor Teskey anticipates that Brookfield Reinsurance (BNRE) will soon write between $15 billion in $20 billion in annuities annually. As this is scaled, BAM’s fee-bearing capital and distributable earnings from this could be given a boost.

BAM also executed an acquisition of a 51% stake in the asset-based private credit company, Castlelake. This company manages roughly $22 billion in AUM and the acquisition will expand BAM’s reach to clients. BAM anticipates a $350 million acquisition cost and $150 million in additional investments will be made on its stake. Teskey forecasts this will add $40 million in fee-related earnings over the next 12 months for the company.

Lastly, BAM upped its stake in Oaktree by 5% to 73%. This was done for $275 million and a FRE multiple of 13.5. So, about $20 million in FRE will be added in the next 12 months from this deal.

Aside from BAM’s improved revamped growth outlook in future quarters, the company has an enviable balance sheet. As of March 31, it had $2.6 billion in cash and cash equivalents. Coupled with strong profitability, that is why S&P awards an A- credit rating to the company on a stable outlook. Just as it did recently, this should provide BAM with the opportunity to execute bolt-on acquisitions in the future (unless otherwise sourced or hyperlinked, all details in this subhead came from BAM’s Q1 2024 Earnings Press Release, BAM’s Q4 2023 Earnings Press Release, BAM’s Q1 2023 Earnings Press Release, and BAM’s Q1 2024 Earnings Presentation).

Shares Are Somewhat Undervalued

Shares of BAM aren’t a downright bargain, but they have become a slightly better value in recent months. Since my last article, shares have dipped 4% as the S&P 500 (SP500) gained 3% in that time.

BAM is priced at a current-year P/E ratio of 26.4 from the current $39 share price. This comes in just below the normal P/E ratio of 26.9 since the spin-off from Brookfield Corporation (BN) in December 2022.

In the years ahead, I believe that the normal P/E ratio of 26.9 can be sustained. That is because, due to the aforementioned moves BAM is making and industry growth, Seeking Alpha’s Quant System projects 16.2% forward EPS growth over the next three to five years. This is better than the financials sector median of 9.6%. That is enough for a B+ grade from the Quant System. In my view, such a valuation multiple would represent growth at a reasonable price.

Given the first quarter results of flat distributable earnings, growth will be more muted in 2024. However, I think it’s reasonable to conclude recent strategic initiatives will reaccelerate growth in 2025. That is why I will be using the 2024 FAST Graphs analyst consensus of $1.47 and the 2025 FAST Graphs analyst consensus of $1.74 as my earnings inputs.

The current week of this year puts 2024 right around the 37% complete mark. That leaves 63% of 2024 and 37% of 2025 ahead in the next 12 months. These weightings provide me with a 12-month forward earnings input of $1.57.

Plugging that earnings input into the valuation multiple of 26.9, I get a fair value of $42 a share. Relative to the current share price, that would be an 8% discount to fair value. If BAM grew as expected and was at my fair value multiple, cumulative total returns could be over 40% through the end of 2026.

Future Dividend Growth Can Be Supported

BAM’s 3.9% forward dividend yield is just above the financials sector median forward dividend yield of 3.6%. This explains the B- grade for forward dividend yield from the Quant System. BAM’s dividend also should grow at a healthy rate in the years to come.

The company’s 93% payout ratio seems elevated versus the 50% payout ratio that rating agencies prefer from the industry. However, a few elements compensate for this payout ratio. As I noted in my previous article, BAM’s business requires very little capex to grow. Additionally, the healthy net cash position translates into just a 2% debt-to-capital ratio. That is well below the 20% that rating agencies desire.

Looking at 2024, BAM is slated to pay $1.52 in dividends per share. This is above the $1.47 in distributable EPS that is anticipated, which would be a 103.4% payout ratio. Now, the company’s results improve as the year goes on due to additional inflows of AUM and its recent deals. The current consensus for 2024 implies $1.13 in distributable EPS against $1.14 in dividends to be paid in the remaining three quarters.

In 2025 and 2026, BAM’s payout ratio should improve to the mid-to upper-90% range when baking in low-double-digit annual dividend growth.

Risks To Consider

BAM is a business with fundamentals that should improve in the quarters ahead. However, it has risks that must be carefully monitored. From my vantage point, BAM’s risk profile is relatively similar to when I last covered it. So, I’ll reiterate a few notable risks.

First, the global alternative asset management industry is very competitive. Meeting growth expectations is going to depend on BAM’s ability to keep quickly responding to client preferences/needs. If the company can’t continue delivering strong returns for clients, that could cause it to lose share to competitors.

Another way BAM could lose ground to peers is if a major cyber breach of its IT networks were to occur. This could lead to lawsuits, and a loss of AUM, and weigh on BAM’s future growth potential.

Finally, BN owns a 75% stake in BAM. It also nominates half of the company’s Board of Directors (page 121 of 207 of BAM’s 40-F filing), so company policy is dictated by BN as much as BAM.

Summary: I’m Buying The Dip

BAM accounts for 0.9% of my individual stock portfolio. Later this week, I will be upping my position by roughly 33% to a 1.2% weighting. The company’s distributable EPS should resume growth in the quarters to come. BAM’s financial positioning remains healthy. Lastly, shares could be discounted from the current $39 share price. That’s why I’m maintaining my buy rating and will soon be adding to my position in BAM.