Magellan Financial Group Ltd (ASX: MFG) was the best-performing share yesterday, with a rise of 14.3% after reporting its FY18 result.
For those that don't know, Magellan is a fund manager business, most of its funds focus on international shares that are predominately listed in the US.
As part of the result, Magellan committed to increasing its dividend payout ratio to 90% to 95% of profit after tax of funds management segment, excluding performance fees. It will also pay an annual performance fee dividend of 90% to 95% f net crystallised performance fees after tax.
This resulted in the total dividends for FY18 being increased by 57% to 134.5 cents per share. This means it has a grossed-up dividend yield of 7% at today's price, even after the growth of the share price.
I have often written about how businesses with high payout ratios are quite dangerous in terms of the dividend. Think of Telstra Corporation Ltd (ASX: TLS) – it wasn't re-investing for growth.
But, Magellan doesn't really need much additional capital to operate or grow. Fund management is very scalable, you can use the same team that just invests bigger amounts of money. So why hold onto money that's not needed? It's not as though Magellan has committed to a 100% dividend payout ratio, just a very high one.
Magellan could continue to grow its funds, and therefore dividend, at a fast rate in the coming years.
Hamish Douglass can compound the current funds at a good rate. This will increase the funds under management (FUM), ignoring inflows or outflows, and therefore increasing the base management fee. Magellan also consistently outperforms, which should lead to performance fees. Continued strong performance should lead to inflows of more funds
Magellan has recognised that having a closed-end structure is good to lock in funds. Over time Magellan Global Trust (ASX: MGG) will get bigger and bigger.
There is also a very good chance that Magellan may expand into other related areas such as retirement income products, or perhaps it will launch regional strategies focused on Europe or Asia.
At 18x FY18's earnings, excluding Magellan Global Trust costs, I think Magellan looks like an attractive growth option and good for income too. Although future dividends may only be partially franked.
