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I last reviewed BlackRock (BLK) in this October 15, 2023 post at which time I stated this is an asset manager in which to invest if you want exposure to the asset management industry.
On January 12, 2024, BLK:
- released its Q4 and FY2023 results; and
- announced the proposed acquisition of Global Infrastructure Partners, a leading independent infrastructure fund manager.
In addition, the U.S. Securities and Exchange Commission's has recently approved the launch of Bitcoin exchange-traded funds by asset managers.
Given the above, this is an opportune time to revisit BLK. Its current valuation, however, is a bit rich so place it on your 'watch list'.
Overview
A comprehensive overview of BLK is provided in Part 1 Item 1 in BLK's FY2022 Form 10-K. I also strongly recommend reviewing the company's website.
Global Infrastructure Partners (GIP) Acquisition
Infrastructure is currently a $1T market and is forecast to be one of the fastest growing segments of private markets in the coming years.
The GIP acquisition is BLK's largest acquisition subsequent to the July 2009 announcement of its decision to acquire Barclays Plc's investment arm (BGI) for $13.5B; this acquisition propelled BLK's growth and created the world's biggest asset manager.
BLK has over $50B of infrastructure client Assets Under Management (AUM) comprised of infrastructure equity, debt and solutions which it has grown both organically and inorganically since inception in 2011. With the impending acquisition of GIP, BLK will increase its infrastructure client AUM to $150B+; GIP, the largest independent infrastructure manager by AUM, has $100B in AUM across infrastructure equity and credit strategies. Its over 40 portfolio companies generate over $75B in annual revenue and employ approximately 115,000 people globally. Details about the firm and some of the major assets within its portfolio are provided on the company's website.
The January 12 Press Release provides a high level overview of the details regarding the acquisition that is slated to close in Q3 2024. The terms of the GIP acquisition include ~30% of the total consideration to be all in BLK stock. The purchase price is comprised of $3B of cash and ~12 million BLK shares; 7 million shares will be paid at closing and 5 million shares will be paid in ~5 years, subject to certain performance measures.
Structuring the acquisition this way means the GIP employees have 'skin in the game' and stand to benefit greatly if BLK shares appreciate in value over the next several years.
Bitcoin ETF
The U.S. Securities and Exchange Commission's has recently approved the launch of Bitcoin exchange-traded funds by asset managers. In this CNBC interview, BLK's CEO is of the opinion this is the first step to broader tokenization of other assets.
Financials
Q4 and FY2023 Results
An overview of BLK's Q4 and FY2023 results is found in this earnings release and earnings supplement.
In the last couple of years, the monetary policy shock of a rapid rate-rising campaign upended 10 years of asset allocation practices and spurred repositioning of portfolios into cash and money market funds at the expense of risk assets.
Throughout 2023, BLK has shared its thoughts about what conditions it expected to bring investors out of cash and into risk assets. With greater clarity on terminal rates in Q4, BLK saw evidence of portfolio rerisking and expectations are for this trend to accelerate in 2024.
Clients continue to consolidate more of their portfolios with BLK and in 2023, it generated $289B of total net inflows and delivered 1% organic base fee growth; it generated ~$96B of total net inflows in Q4 alone.
In November and December, BLK witnessed a surge in flows, resulting in a ~6% annualized organic base fee growth for the last two full months of the year. Full year revenue of ~$17.9B, however, was relatively flat YoY.
Source: BLK - Q4 2023 Earnings Release Supplement
Operating Cash Flow (OCF) Free Cash Flow (FCF)
In FY2017 - FY2022, BLK generated OCF of (in $B) 3.950, 3.075, 2.884, 3.743, 4.944 and 4.956 and FCF of (in $B) 3.795, 2.871, 2.630, 3.549, 4.603, and 4.423.
In the first 3 quarters of FY2023, BLK generated $2.167B net cash from its operating activities. CAPEX amounted to $0.22B giving us FCF of ~$1.947B. While the Form 10-K is not available as I compose this post, I envision BLK will have generated ~$2.6B of FCF in FY2023. I essentially divided the FCF at the end of Q3 by 3 and added this to ~$1.947B.
Risk Assessment
BLK's FYE2023 Balance Sheet is currently unavailable. The following, however, reflects BLK's long-term borrowings at the end of Q3 2023.
Source: BLK - Q3 2023 Form 10-Q
The following reflects BLK's long-term borrowings at the end of Q2 2023.
Source: BLK - Q2 2023 Form 10-Q
In June 2018, Moody's upgraded BLK's domestic senior unsecured credit rating to Aa3 from A1. This Aa3 rating has been in effect since this upgrade and Moody's assigns a stable outlook.
In May 2014, S&P Global upgraded BLK's domestic senior unsecured credit rating to AA- from A+. This AA- rating has been in effect since this upgrade and S&P Global assigns a stable outlook.
Both ratings are the bottom tier in the high-grade investment-grade category. These ratings define BLK as having a very strong capacity to meet its financial commitments. The ratings differ from the highest-rated obligors only to a small degree.
These investment-grade ratings are acceptable for my purposes.
BLK intends to fund the cash consideration of the GIP acquisition through $3B of additional debt. It is of the opinion there will be no change in its current credit ratings. Even if both rating agencies were to downgrade BLK's rating by one tier, the ratings would still satisfy my conservative investor profile.
The following reflects BLK's quarterly capital management allocation for the past 2 fiscal years.
Source: BLK - Q4 2023 Earnings Release Supplement
Dividend and Dividend Yield
BLK initiated a quarterly dividend in 2003 (see dividend history).
In my October 15, 2023 post I wrote:
BLK typically declares a dividend increase in mid-late January. If we conservatively estimate a 3% increase ($5 increasing to $5.15) in January 2024, the next 4 dividend payments will total $20.45 ($5 + ($5.15 x 3)). Using the current $627.66 share price, the forward dividend yield is ~3.26%.
On January 12, BLK announced a $0.10/share (2%) increase in its quarterly dividend to $5.10 with the first dividend at this level payable on March 22.
With BLK shares having closed at ~$800 on January 12, the dividend yield is ~2.55%.
Dividend metrics should be irrelevant in deciding whether or not to invest in a company. An investor should focus on an investment's total potential investment return.
I envision the dividend component of BLK's total long-term investment return will pale in comparison to capital gains.
BLK's capital allocation priority is to invest either to scale strategic growth initiatives or drive operational efficiency. Once this is achieved, BLK returns excess cash to its shareholders through a combination of dividends and share repurchases.
In FY2023, BLK returned over $4.5B to its shareholders through a combination of dividends and share repurchases. Share repurchases have been a consistent element of its capital management strategy. Since 2013, its has repurchased close to $15B of BLK stock. Over this time period, the share count has been reduced by nearly 23 million shares or 13%. For the trailing 5 years, the share count has been lowered by 10 million shares.
Based on capital spending plans for 2024 and subject to market conditions, including the relative valuation of BLK's stock price, the target is to repurchase $1.5B of shares during FY2024.
Valuation
BLK's FY2013 - FY2022 PE levels based on diluted EPS are 19.93, 18.57, 17.58, 20.08, 24.16, 11.30, 19.47, 24.07, 24.45, and 19.60.
When I initiated a position in BLK, the forward valuation based on currently available adjusted earnings estimates and a ~$651.28 share price was:
- FY2023 - 16 brokers - mean of $35.04 and low/high of $33.00 - $37.94. Using the mean estimate, the forward adjusted diluted PE is ~18.6.
- FY2024 - 16 brokers - mean of $39.90 and low/high of $36.15 - $42.23. Using the mean estimate, the forward adjusted diluted PE is ~16.3.
- FY2025 - 6 brokers - mean of $45.53 and low/high of $42.32 - $48.66. Using the mean estimate, the forward adjusted diluted PE is ~14.3.
When I wrote my July 20 guest post, BLK had generated $16.70 and $17.21 in diluted EPS and adjusted diluted EPS, respectively in the first half of FY2023.
BLK’s forward valuation based on currently available adjusted earnings estimates and the ~$728 share price was:
- FY2023 – 15 brokers – mean of $35.21 and low/high of $34.10 – $36.47. Using the mean estimate, the forward adjusted diluted PE is ~20.7.
- FY2024 – 15 brokers – mean of $40.49 and low/high of $37.30 – $45.19. Using the mean estimate, the forward adjusted diluted PE is ~17.8.
- FY2025 – 8 brokers – mean of $45.97 and low/high of $41.36 – $49.06. Using the mean estimate, the forward adjusted diluted PE is ~15.3.
I thought it was conceivable that BLK would double its YTD diluted EPS. Using $33.40 as BLK’s FY2023 diluted EPS and a ~$728 share price, the forward diluted PE for FY2023 was ~21.8.
When I wrote my October 15, 2023 post, BLK had reported $10.66 and $10.91 in diluted and adjusted diluted EPS for Q3. In the first 3 quarters of FY2023, it generated $27.36 and $28.12 in diluted and adjusted diluted EPS. Using the current $627.66 share price and the currently available broker estimates to determine BLK forward adjusted diluted PE levels I arrived at the following forward adjusted diluted PE levels:
- FY2023 – 15 brokers – mean of $35.82 and low/high of $34.02 – $37.06. Using the mean estimate: ~17.5.
- FY2024 – 14 brokers – mean of $38.37 and low/high of $35.10 – $41.87. Using the mean estimate: ~16.4.
- FY2025 – 11 brokers – mean of $43.14 and low/high of $39.05 – $46.39. Using the mean estimate: ~14.5.
BLK shares now trade at ~$800 and it has just reported FY2023 $36.51 of diluted EPS and $37.77 of adjusted diluted EPS. BLK's diluted PE and adjusted diluted PE are, therefore, ~22 and ~21.2.
Using the current share price and the currently available broker estimates to determine BLK forward adjusted diluted PE levels I get the following forward adjusted diluted PE levels:
- FY2024 – 16 brokers – mean of $39.13 and low/high of $35.09 – $43.16. Using the mean estimate: ~20.4.
- FY2025 – 12 brokers – mean of $44.55 and low/high of $40.50 – $48.73. Using the mean estimate: ~18.
Analyst estimates will likely be revised over the coming days. BLK, however, has indicated the GIP acquisition is expected to be modestly accretive to its adjusted diluted EPS and operating margin in the first full year after the anticipated Q3 2024 close. I do not, therefore, expect the current mean forward adjusted diluted EPS estimates for FY2024 and FY2025 will meaningfully change from the current levels.
Final Thoughts
BLK is a great asset manager in which to have exposure, however, it is important not to overlook its valuation. Acquire overvalued shares and it becomes difficult to generate an attractive return!
I think there is currently an element of irrational exuberance amongst a great many investors and BLK's share price has been caught up in this euphoria. I much prefer to acquire additional BLK shares when the euphoria surrounding the GIP acquisition and the launch of Bitcoin ETFs wanes.
BLK's share price is somewhat volatile and I think there is a reasonable probability patient shareholders will be able to acquire BLK shares at more favourable valuations as some point in 2024.
I wish you much success on your journey to financial freedom!
Note: Please send any feedback, corrections, or questions to [email protected].
Disclosure: I am long BLK.
Disclaimer: I do not know your circumstances and do not provide individualized advice or recommendations. I encourage you to make investment decisions by conducting your research and due diligence. Consult your financial advisor about your specific situation.
