Investment manager Invesco Ltd. (IVZ) has not been flavor of the month among many analysts, and is currently trading cheaply. Whether it is a value opportunity or a value trap is what I hope to determine in this article.
Invesco has suffered a couple of downgrades earlier this month. Christopher Harris, a Wells Fargo analyst, downgraded Invesco from Equal weight to Underweight, and Kenneth Lee at RBC downgraded it from Outperform to Sector Perform, citing uncertainty about flows in the current financial year as opposed to its peers. Specifically, net outflows for international equities and “modest in-flows into fixed-income AUM” informed Lee’s decision.
It has to be said that this prognosis does not quite square with how AUM has performed over the last six months of 2019. July saw very minimal growth, and August was the only month which suffered a dip – otherwise, there was little for Invesco to feel blue about, particularly with regard to December when they reported AUM worth $1.226 billion as of 12/31/2019.
Figures collated from Seeking Alpha and press releases from Invesco’s investor relations page.
There is quite a bit to be bullish about regarding Invesco, in fact. Many DIY investors would argue the converse, stating that investment managers are going the way of the dinosaurs due to passive ETFs that charge no fees being opted for in preference to active asset managers that do charge fees. This point, however, presupposes that most people have the time and inclination to look after their own investments, and that simply is not so. Consequently, investment managers like Invesco are going nowhere.
While Invesco has been downgraded, there is plenty of value here for a prospective investor. Image provided by AD Display Signs.
Invesco specifically has other strengths beyond the indispensability of investment managers in general, however. This investment manager is a global player with 8,000 employees working in twenty-five countries to serve client needs. This global presence allows Invesco to diversify its offerings to clients, as it diversifies by client domicile, by client channel, and by asset class. At Q3 2019, AUM was $1.164 billion, and diversification of AUM by the above three criteria can be seen in the following tables, the figures for which are derived from the Q3 2019 presentation.
|Client Domicile||Amount ($)||Percentage (%)|
|EMEA ex U.K.||135.7 million||12|
Q3 2019 AUM divided by client domicile.
|Client Channel||Amount ($)||Percentage (%)|
Q3 2019 AUM divided by client channel.
|Asset Class||Amount ($)||Percentage (%)|
|Money Market||97.7 million||8|
|Fixed Income||281.1 million||24|
Q3 2019 AUM divided by asset class.
Invesco lowers its own risk through such diversification in assets across the world, and that this approach has paid off can be seen in the revenue and net income figures that it has reported over the past five years.
|Year||Revenue ($)||Net Income ($)|
|2014||5.21 billion||991.5 million|
|2015||5.06 billion||943.5 million|
|2016||4.77 billion||829.4 million|
|2017||5.29 billion||1.09 billion|
|2018||5.24 billion||855.9 million|
Figures collated from annual reports available on Invesco’s investor relations page.
Quarterly results for the present financial year show a continuation of this trend. The Q2 2019 net income results are an anomaly linked to transaction, integration, and restructuring costs related to the acquisition of OppenheimerFunds, which added $224.4 billion to AUM for Q2 2019. Otherwise, a steady pattern can be seen continuing.
|2019 Quarter||Revenue ($)||Net Income ($)|
|Q1||1.24 billion||171.7 million|
|Q2||1.46 billion||40.1 million|
|Q3||1.73 billion||231.5 million|
|Total||4.43 billion||443.3 million|
Figures collated from quarterly reports available on Invesco’s investor relations page.
This steadiness is reflected in management’s ability to extract profit from revenues over the same time-frame. Operating margin (trailing twelve months) is 23.48%, a figure that is not wildly out of line with that reported over the past five years.
|Year||Operating Margin (%)|
Furthermore, management’s ability to deliver return on equity further illustrates the steadiness of Invesco’s business. Return on equity (trailing twelve months) is 5.09%, which is lower than previous years but must be seen in light of the OppenheimerFunds acquisition.
|Year||Return on Equity (%)|
Shareholders have also been rewarded with ten years of consecutively rising dividend payments, a record that looks set to continue given Invesco’s 48.10% payout ratio and strong balance sheet. With long-term debt of $7.78 billion dwarfed by a net worth of $14.36 billion, cash-on-hand worth $1.53 billion, short-term investments worth $26.5 million, and short-term receivables of $1.02 billion, Invesco is well-positioned to cope with any financial headwinds that may come its way.
All of the above points to Invesco being a steady business, but it is not a fast-growing one, as EPS over next five years is estimated to be 2.51%. Consequently, a prospective investor will want a discounted price on the stock in order to ensure a decent return on their investment.
Invesco currently trades at $18.06 per share. Chart generated by FinViz.
Currently, Invesco trades at a share price of $18.06 with a price-to-earnings ratio of 15.44, which is higher than its five-year average P/E of 13.19. By contrast, its current dividend yield of 6.81% is higher than its five-year average dividend yield of 4.21%. This mixed picture makes it imperative to establish what fair value for Invesco is.
To determine fair value, I will first divide the current P/E by the historical market average of 15 to get a valuation ratio of 1.03 (15.44 / 15 = 1.03), and then divide the current share price by this valuation ratio to get a first estimate for fair value of $17.53 (18.06 / 1.03 = 17.53). Then, I will divide the current P/E by the five-year average P/E to get a valuation ratio of 1.17 (15.44 / 13.19 = 1.17), then divide the current share price by this valuation ratio to get a second estimate for fair value of $15.44 (18.06 / 1.17 = 15.44).
Next, I will divide the five-year average dividend yield by the current dividend yield to get a valuation ratio of 0.62 (4.21 / 6.81 = 0.62), then divide the current share price by this valuation ratio to get a third estimate for fair value of $29.13 (18.06 / 0.62 = 29.13). Finally, I will average out these three estimates to get a final estimate for fair value of $20.70 (17.53 + 15.44 + 29.13 / 3 = 20.70). On the basis of this estimate, the stock is undervalued by 15%.
In summary, while Invesco has had some bearishness, it is my contention that this bearishness is unjustified. The business is a solid one due to its diversified operations, its indispensability, and its strong financial position. At a 15% discount, it currently offers a sustainable 6.81% dividend, and is consequently a stock I have no hesitation in recommending.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in IVZ over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.