Contents
At The Goldman Sachs Group Inc.'s (GS) January 29, 2020 Investor Day, senior management laid out the company's strategic roadmap and goals. Management indicated that GS was entering an era of transformation and opportunity which required a new operating approach.
Four areas of focus (Transaction Banking, Third Party Alternatives, Digital Consumer Bank, and Wealth Management) to help the bank achieve aggressive medium term financial targets were presented.
Less than two months after this January 2020 Investor Day presentation, the COVID-19 pandemic hit North America! Despite challenging business conditions, GS generated strong FY2020 results.
Summary
- GS has been in business ~152 years and has built an enviable reputation wherein it often ranks as the world's top adviser on mergers and acquisitions.
- In July 2020, GS paid ~$4B to settle the Malaysian government’s charges against the bank. In October 2020, GS agreed to pay a $2.3B fine to the U.S. Justice Department and other regulators and a further $0.6B in disgorgement of ill-gotten gains to settle the U.S. probe and avoid a criminal conviction at the group level.
- Share count has been aggressively reduced over the years having dropped to 360.3 million in Fy2020 from 585.3 million in FY2010.
- Shares are currently valued at a PE of ~11.7 based on the current ~$289.50 share price. Even if FY2021 earnings increase marginally to $25/share and the PE expands to ~13 - 14 times, investors could see GS's share price appreciate in value to ~$325 - $350.
- Investors seeking attractive dividend income from their investments may wish to invest elsewhere as the company does not increase its quarterly dividend every year and its current dividend yield is sub 2%.
Introduction
The team at Goldman Sachs Group, Inc. (GS) is occasionally referred to as the 'evil geniuses of the investment world' yet the same people who use this term are likely envious and wish they were as consistently successful as GS.
I disclosed in this November 18, 2018 article that I would be initiating a position GS; I initiated the trade after publishing the article. On April 16, 2019 I disclosed a GS option trade. In my July 16, 2019 article I indicated I was tempted to acquire additional GS shares but foolishly passed on doing so. The last time I touched upon GS was in this October 16, 2019 article at which time I disclosed that I had closed out the option trade which netted me a small profit after trade commissions.
A great opportunity to add to my GS position would have been during the March/April 2020 market pullback but I ended up deploying funds to acquire shares in other high quality companies which were attractively valued.
Fast forward to the January 19, 2021 Q4 and FY2020 earnings release and 'Strategic Update'. Based on my analysis and how I think GS will perform going forward I have acquired additional shares in one of the 'side' accounts within the FFJ Portfolio.
Business Overview
I often recommend that any investor desiring to learn about a company look to the first part of a company's 10-K in which an overview of the business is provided. In the case of GS, the 2020 Annual Report and 10-K have not yet been uploaded to the company's website, and therefore, this information can be obtained from the 2019 Annual Report and 10-K.
GS has a rich history having been founded in 1869; a brief history of the company can be found here. Even more fascinating is a 10-part documentary in which GS's history is chronicled.
Q4 and FY2020 Financial Results
In mid-March 2020, the COVID-19 pandemic hit North America and the business world was turned on its head. Roughly one month later, on April 15, 2020, GS released Q1 results for the quarter ending March 31, 2020 at which time it reported Net Revenue of $8.74B, Net Earnings of $1.21B, and EPS of $3.11.
Fast forward to the end of the fiscal year and we see from GS's Q4 and FY2020 results that FY2020 Net Revenues amounted to $44.56B, Net Earnings were $9.46B, and EPS was $24.74. Comparing FY2020 to Q1 2020 results we see that GS performed admirably during challenging times. These results are even more impressive considering that GS paid ~$6.9B as part of its settlement related to its role in Malaysia’s 1MDB corruption scandal which I touched upon in previous articles.
According to data compiled by Bloomberg, GS was the world’s top adviser on mergers and acquisitions in 2020 for the 4th consecutive year and it was the only bank with more than 30% of market share (32% market share and $848.6B in deal volume). It gained market share both through mega-deals using its worldwide presence, and with work in the middle market that helped boost the firm’s transaction count; ~33% of the 400 deals GS advised on involved firms of a relatively smaller size.
GS took the #1 spot among lead-left bookrunners, or managing underwriters, for highly sought after positions on IPOs. In fact, GS was listed as the top adviser on the deals for Snowflake Inc. and DoorDash Inc.; these were two of the top three U.S. technology listings.
The emergence of special purpose acquisition vehicles (SPACs) helped increase equity issuance to new levels with SPACs having raised the most money on record; the head of global debt and equity capital markets at Credit Suisse calculated that SPACs represented more than 50% of the IPO market in the U.S. in 2020.
The large number of SPACs going public has the potential to boost merger activity, as the blank-check firms must pursue an acquisition in a given amount of time.
From an IPO Adviser Rankings perspective, GS came in 2nd with a 6.1% market share behind Credit Suisse's 6.2% market share.
GS also came in 1st with a 21.9% market share for 'Lead' with Citigroup coming in a distant 2nd at 16.7% market share.
While the early days of Covid-19 prompted many companies to draw on bank revolvers, that was followed by a surge in investment-grade debt issuance and then high-yield offerings. In this area of business JPMorgan was the top underwriter with Bank of America and Citigroup coming in 2nd and 3rd.
Dealmakers have indicated 2020 was the year to raise liquidity but 2021 financing will likely shift back to event financing (ie. mergers and leveraged buyouts).
In Canada, GS held on as the top adviser for mergers and acquisitions for the 3rd straight year.
FY2021 Strategic Update
As presented here, GS has made and continues to make, good progress toward achieving its medium-term goals.
Credit Ratings
GS's credit ratings can be found on page 5 in this August 2020 overview. While a couple of quarters have elapsed since that presentation was prepared, a quick review of each rating agency's website raises no 'red flags'. While Goldman Sachs Group Inc.'s long-term debt rating assigned by each rating agency differs from one another, all three different ratings (Moody's, S&P Global, and Fitch) are investment grade ratings.
I feel comfortable with this level of risk.
Valuation
GS has reported FY2020 diluted EPS of $24.74. Using the current ~$289.50 share price we arrive at a PE of ~11.7. Looking at GS's PE ratios for FY2011 - 2019 we see 13.93, 9.03, 10.78, 11.23, 11.84, 19.09, 13.30, 11.84, and 10.27.
GS is 'best in class' and if the yield curve rebounds and we get more economic stimulus in the US, it would not surprise me if FY2021 were another strong year and the PE ratio were to expand. If FY2021 earnings came in at $25 and the valuation expanded to ~13 - 14, then a price of ~$325 - $350 is not out of the realm of possibility.
On the basis of FY2021 adjusted earnings estimates from 19 analysts ranging from $24.34 - $34.15 and a mean of $29.12 we get a forward adjusted PE of ~9.94 using the current ~$289.50 share price.
Based on the above, I view GS shares as attractively valued hence my reason for acquiring more shares.
GS is certainly not an investment which would appeal to investors who seek an attractive dividend yield or a track record of steadily increasing dividends. GS, in fact, does not even have a page on its website where you can access the dividend history. I have located GS's dividend history on an external site and have noticed that GS often held its quarterly dividend steady for several consecutive quarters; the earliest quarterly dividend I was able to indentify was $0.12 paid in November 2000. The current $1.25 quarterly dividend has been in place since the September 27, 2019 payment date and I see that GS has declared a $1.25 quarterly dividend payable the end of March 2021.
With the current dividend yield being ~1.73% on the basis of the current ~$289.50 share price, my decision to acquire additional GS shares is not driven from an income perspective. In fact, my dividend yield is lower in that GS shares are held in a non-registered account where I incur a 15% withholding tax on dividends paid by US companies. Factoring into account the withholding tax, I receive $1.0625/share/quarter or $4.25/share/year for a dividend yield of ~1.46%.
As indicated in previous articles, I have created an investment portfolio of high quality companies where I have a mix of 'value' and 'growth' companies. NOTE: I merely use the term 'growth' and 'value' to differentiate if the potential investment return is more apt to come via dividend income or capital gains. Quite frankly, however, all intelligent investing is really value investing as explained by Charlie Munger in this interview; it does not matter if you are investing in 'steady eddy' companies or 'growth' companies.
GS has been a prolific buyer of its issued and outstanding shares over the years. Looking at the average number of diluted shares outstanding in FY2020 we see 360.3 million versus 585.3 million in FY2010 (see page 102 of 366 in GS's 2010 10-K). Looking at GS's historical track record of repurchasing shares, I have no reason to believe this will not continue in the coming years.
Final Thoughts
GS has been in existence for ~152 years and has created an enviable track record of success. Looking at GS's historical track record, the firm has managed to make money regardless of economic conditions. Even though regulators will very likely be tougher on Wall Street businesses than under Trump's tenure as 'President', GS has performed admirably when the Democrats were in power. I have no reason to expect GS will NOT aptly reward shareholders over the next 4 years just because the US has a Democrat President.
I continue to be optimistic that we will get a long overdue broad market pullback. Depending on circumstances if/when this does occur, I would like to increase my GS exposure.
Stay safe. Stay focused.
I wish you much success on your journey to financial freedom!
Note: Thanks for reading this article. Please send any feedback, corrections, or questions to [email protected].
Disclaimer: I have no knowledge of your individual circumstances and am not providing individualized advice or recommendations. I encourage you not to make any investment decision without conducting your own research and due diligence. You should also consult your financial advisor about your specific situation.
Disclosure: I am long GS.
I wrote this article myself and it expresses my own opinions. I am not receiving compensation for it and have no business relationship with any company whose stock is mentioned in this article.
