Asset manager and investment bank Macquarie Group Ltd (ASX: MQG) reported its earnings result for the half-year ending September 30 2016 (1H17) this morning. A summary of which is below:
- 1H17 net profit of $1,050 million, down 2% on 1H16 and up 6% on 2H16
- 1H17 operating income of $5,218 million, down 2% on 1H16 and up 8% on 2H16
- 1H17 earnings per share (EPS) of $3.12, down 4% on 1H16 and up 6% on 2H16
- 1H17 dividend of $1.95 per share, up 18.75% on 1H16 on a payout ratio of 62%
- Annualised return on equity of 14.6%, down from 15.8% in 1H16
- Around 70% of earnings in 1H17 came from asset management style activities
- Forecast for full year FY17 earnings to be "broadly in line" with FY16
The result is ahead of analysts' expectations and the sharp lift in the dividend is likely to put the cat amongst the pigeons for analysts who were largely forecasting a minimal to flat rise. Income-hungry investors are also likely to applaud the move and if the group lifts FY16's final dividend ($2.40) by at least a double-digit amount then the stock is likely to be on a forward yield of 5.7% plus franking credits for FY17.
The valuation also remains reasonable on around 12.5x forward earnings assuming the group meets its own forecasts for FY17's earnings to be brodly in line with FY16. If the Australian dollar tracks lower over the six months to April 2017 on the back of U.S. economic strength the group is likely to receive a nice tailwind with around 60% of its total income earned overseas in H1 17.
Management's strategy
Macquarie is also continuing to shift its focus into the asset management space as regulators tighten their post-GFC grip on the regulation and leverage of investment and mainstream banks alike.
Due to new and expected capital adequacy regulations the Macquarie bankers are trying to move away from business operations that require a lot of capital such as lending and derivative trading in favour of asset management, as this is a relatively capital light business activity that offers the serendipitous bonus of more reliable fee streams.
It's also fortunate for investors that Macquarie's management woke up to the prospect of tightening capital adequacy regulations in good time and the bank has spent the past few years implementing its strategy to deleverage in response to toughening capital adequacy requirements. Another example of which is the sale of its capital-heavy life insurance business to Zurich over the reporting period. The sale directly supported the earnings result and should help demonstrate to investors why Macquarie is able to generate market-thumping returns for shareholders.
The problems facing the life insurance industry are no big secret and while groups like Macquarie have the dexterity to adapt by selling in order to improve their capital positions, others like AMP Limited (ASX: AMP) continue to post huge write downs (just today) as they don't have the operational competence of superior businesses.
Even the National Australia Bank Ltd (ASX: NAB) recently moved to sell its life insurance business after the penny dropped that regulators would not be backing down in terms of increased capital adequacy requirements. Consequently, NAB's shares lifted on yesterday's overall result, although really it should have sold or spun off its poorly-performing life insurance business several years ago.
Macquarie's Outlook
In my opinion Macquarie's solid management team and continuing shift into the asset management space are what means it is an attractive long-term investment. At $80.02 the shares look reasonable value and I would look to enter the stock by buying in parcels over a 6 to 18-month period in order to even out the effects of the inevitable volatility in global capital markets.
