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I last reviewed Goldman Sachs (GS) in this January 22, 2021 post at which time I included a link to GS's Strategic Update. In that post, I also disclose the purchase of additional shares within one of the 'Side' accounts in the FFJ Portfolio.
Looking at GS's YTD2021 results, I see that GS has made, and continues to make, good progress toward achieving its medium-term goals.
NOTE: GS's earnings have historically been volatile so investors need to keep this in mind. It is, however, making great progress in reducing the capital intensity of its businesses and in increasing revenue durability.
Goldman Sachs - Stock Analysis - Business Overview
Part 1 of GS's 2020 10-K provides a comprehensive overview of the company.
A brief history of the company is found here and there is a fascinating 10-part documentary in which GS's history is chronicled.
Goldman Sachs - Stock Analysis - Financials
On July 13, 2021, GS released Q2 and YTD 2021 results in which it reported net revenues of $15.39B and net earnings of $5.49B for Q2 ending June 30, 2021. Net revenues were $33.09B and net earnings were $12.32B for the first half of 2021.
Diluted EPS was $15.02 for Q2 compared with $0.53 for Q2 2020 and $18.60 for Q1. Diluted EPS of $33.64 was reported for the first half of 2021 compared with $3.66 for the first half of 2020. In the prior year, net provisions for litigation and regulatory proceedings reduced diluted EPS by $8.23 for Q2 2020 and $8.76 for the first half of 2020.
Details of GS's Q2 and YTD results are found in the Earnings Release and the Earnings Presentation.
I highly recommend investors listen to GS's CFO on Q2 Earnings Results, why he is confident in the durability of that performance across businesses, and key themes to watch in the second half of 2021 in this 12-minute video!
Goldman Sachs - Stock Analysis - Credit Ratings
GS's credit ratings can be found in the Credit Profile (page 5) of this Investor Overview.
Ratings for several GS entities are reflected on this credit profile. The ratings of interest to me are the senior unsecured long-term debt ratings for The Goldman Sachs Group, Inc. as this is the entity whose shares trade publicly.
- Moody's assigns an A2 rating; this rating was upgraded from A3 on January 27, 2021.
- S&P Global assigns a BBB+ rating; this was last reviewed on May 24, 2021 and the credit outlook is stable.
- Fitch assigns an A rating; GS's February 19, 2021 credit profile indicates a negative rating outlook. A quick check on Fitch's website shows the A rating having been affirmed on April 23, 2021.
The Moody's and Fitch ratings are the middle tier of the upper-medium grade investment-grade category. The rating assigned by S&P is two notches lower at the top tier of the lower-medium grade investment-grade category.
Moody's and Fitch define GS as having a STRONG capacity to meet its financial commitments. It is, however, somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligors in higher-rated categories.
S&P Global defines GS as having an ADEQUATE capacity to meet its financial commitments. Adverse economic conditions or changing circumstances, however, are more likely to lead to a weakened capacity of the obligor to meet its financial commitments.
Despite the variance in ratings, all 3 ratings are satisfactory for my purposes.
Dividend and Dividend Yield
GS does not maintain a dividend history on its website but this history is accessible here.
After the 2008 Financial Crisis, The Dodd-Frank Act was passed. This act requires the nation's biggest, most complicated banks to undergo a set of tests to see how well their balance sheets would hold up against a severe economic meltdown. The tests vary from year to year, but generally involve the Fed testing to see how much in losses the banking industry would incur if unemployment were to skyrocket and economic activity were to severely contract.
In June 2020, The Federal Reserve put new restrictions on the U.S. banking industry after its annual stress test found several banks could get uncomfortably close to minimum capital levels in scenarios tied to COVID-19. As part of these restrictions, the big banks had to suspend share buybacks and cap dividend payments at their current level for Q3 2020. In addition, the regulator only allows dividends to be paid based on a formula tied to a bank’s recent earnings.
For the first time in the decade-long history of the stress test, industry participants were also to be subject to ongoing scrutiny; they were required to resubmit their payout plans in late 2020.
In June 2021, the Fed deemed all 23 of the US's biggest banks to be sufficiently healthy to withstand a sudden economic catastrophe. With the release of its results from its latest 'stress tests', the banks were given the green light to resume dividend increases and share repurchases.
Following GS's 2nd highest quarterly and highest ever first-half revenues, which drove YTD ROE of 27.3%, and the ongoing efforts to reduce the capital intensity of its businesses and increase revenue durability, GS is seeing opportunities to return capital to shareholders. In this regard, GS's Board authorized an increase in the quarterly dividend from $1.25 to $2.00 commencing with the September 29 dividend to shareholders of record on September 1.
Based on the current ~$375 share price, the new dividend yield will be ~2.1%.
GS has been a prolific buyer of its issued and outstanding shares over the years with the FY2009 - FY2020 weighted average number of diluted shares outstanding (in millions) being 550.9, 585.3, 556.9, 516.1, 499.6, 473.2, 458.6, 435.1, 409.1, 390.2, 375.5, and 360.3. For the 6 months ending June 30, 2021, this was further reduced to 358.4 through the repurchase of 2.8 million shares at an average cost of $350.90.
I think GS's share repurchase activity will be more limited than other large banks. Most other large US banks have excess regulatory capital so they can return capital via share repurchases in excess of their net income. GS's common equity Tier 1 ratio, however, is near its requirement and its own long-term target. This leads me to think total capital returns will be limited to roughly GS's net income over the remainder of FY2021.
Goldman Sachs - Stock Analysis - Valuation
At the time of my January 22, 2021 post, GS had recently reported FY2020 diluted EPS of $24.74. Using the current ~$289.50 share price I arrived at a PE of ~11.7. During the FY2011 - 2020 timeframe, GS's PE ratios were 13.93, 9.03, 10.78, 11.23, 11.84, 19.09, 13.30, 11.84, 10.27, and 15.19.
In that post I indicated:
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.
Based on 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.
GS currently trades at ~$375 and in the first half of FY2021, it has generated $33.64 in diluted EPS. Management does not provide guidance so I rely on the forward-adjusted diluted PE guidance currently available from the trading platforms of the 2 discount brokerage firms I use.
- FY2021: 22 brokers, mean estimate $53.14, low/high range $48.39 - $60. Valuation using mean estimate is ~7 and ~6.25 using the high end of the range.
- FY2022: 22 brokers, mean estimate $37.31, low/high range $32.98 - $41.50. Valuation using mean estimate is ~10 and ~9 using the high end of the range.
- FY2023: 11 brokers, mean estimate $39.53, low/high range $34.37 - $43.70. Valuation using mean estimate is ~9.5 and ~8.6 using the high end of the range.
Although GS certainly looks attractive from a valuation perspective, investors need to consider the following.
- projections call for earnings to pullback in FY2022 and FY2023;
- the range of forward-adjusted diluted EPS estimates vary significantly;
- GS's earnings have historically been somewhat volatile.
Looking at the Strategic Update for which a link is provided at the beginning of this post, however, we see that generating more durable earnings and higher margins and returns are two key goals.
Goldman Sachs - Stock Analysis - Final Thoughts
If I have any concern about GS, it is the volatility of its earnings. Having said this, David Solomon succeeded Lloyd Blankfein as Chairman and CEO. Under Solomon's mandate, GS is to reduce earnings volatility. A very small example of this is the July 26th announcement that GS Transaction Banking will streamline supplier payments made via B2B accounts payable solutions offered by Fiserv.
As much as I eventually intend to acquire additional GS shares, the account in which I currently hold a GS position currently does not have sufficient cash on hand to make any meaningful purchase. GS has also recently reported near-record earnings and based on FY2022 and FY2023 guidance from multiple brokers, it is quite possible GS's share price could experience a pullback.
I am in no rush to acquire additional shares and will continue to look for other companies in which to invest.
Stay safe. Stay focused.
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 GS.
Disclaimer: I do not know your individual circumstances and do not provide individualized advice or recommendations. I encourage you to make investment decisions by conducting your own research and due diligence. Consult your financial advisor about your specific situation.
I wrote this article myself and it expresses my own opinions. I do not receive compensation for it and have no business relationship with any company mentioned in this article.
