Why the Magellan (ASX:MFG) share price could be a buy

Magellan shares could be worth looking at.

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The Magellan Financial Group Ltd (ASX: MFG) share price could be one to look at.

What does the company do?

Magellan is a funds management business that was established in 2006 and manages over $100 billion of funds under management (FUM) across its global equities, global listed infrastructure and Australian equities for investors.

What has been happening with Magellan recently?

The latest monthly update was for the period to 30 July 2021 which showed that Magellan's total FUM grew from $113.9 billion to $117 billion. In FY21, Magellan ended with FUM of $113.9 billion.

Average FUM for FY21 was $103.7 billion, compared to $95.5 billion for FY20. The fund manager also said that it's entitled to estimated performance fees of approximately $30 million for FY21.

The latest result that the ASX share delivered to the market was the FY21 half-year result. That included showing average funds under management increased 9% to $100.9 billion, management and service fees revenue grew 8% to $311.4 million and profit before tax and performance fees of the funds management business increased 8% to $256.2 million.

The Magellan share price is almost flat since it delivered this interim report six months ago.

But another element of the business, aside from various funds management initiatives, is its principal investments division.

Principal investments

There are four things that Magellan looks for with its external investments.

The potential investment must have high-quality management teams, with no operational involvement by Magellan and no distraction for its funds management business.

They are to be high-quality companies with meaningful scale in their sector.

Any investment must contribute to the intellectual capital of the business and provide meaningful optionality.

Finally, the potential investment should aim to provide attractive financial returns.

There are three major investments that Magellan has done so far.

One is Barrenjoey – it spent $156 million investment for a 40% non-dilutive economic stake. It's a new, local investment bank that is now offering various services.

Next is FinClear, which Magellan invested $20 million for a 16% shareholding. It offers a "complete suite of trading and administrative functions for any business providing financial advice or wealth management services." It 'touches' more than half of all retail equity transactions in Australia each day.

Finally, it has invested in Guzman y Gomez, the Australian fast food business serving Mexican food. At the last update, it had around 150 restaurants across Australia, Singapore, Japan and the USA. It also said that more than 70% of restaurants were exceeding a return on investment (ROI) of 25%. Australian like for like growth in the FY21 year to date (announced in February) was 27%.

Is the Magellan share price a buy?

One of the elements that may be interesting to investors about Magellan is its high dividend payout ratio. It has committed to pay out at least 90% of its net profit each year.

The broker Morgans currently rates Magellan as a buy with a price target of $58.05. That suggests the Magellan share price could rise by more than 10% over the next 12 months, if the broker is right.

Morgans points to the continuing growth of Magellan's FUM and the fact that the FUM at the beginning of FY22 is quite a bit higher than the average FUM of FY21.

New options for investors could also help earnings growth over time. Magellan recently launched a retirement product like FuturePay.

According to Morgans, the Magellan share price is valued at 20x FY22's estimated earnings with a future partially franked dividend yield of 4.5%.

Motley Fool contributor Tristan Harrison owns shares of Magellan Financial Group. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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