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Keep This Strong Dividend Payer on Your Radar

Greggory Warren, CFA

Greggory Warren: The U.S.-based asset managers are generally not known as dividend payers, but the average yield for the group is 2.8% right now, better than the S&P 500 at 1.9%. One of the stronger yields in the group comes from narrow-moat rated Invesco, which with more than $900 billion in AUM, is a solid, second-tier asset manager behind multitrillion dollar asset managers like BlackRock and Vanguard. We feel the firm has the size and scale that's necessary to be competitive in the industry.

Invesco's current quarterly dividend of $0.29 per share works out to a yield of 3.3%, better than just about every firm in our coverage and one of the more secure dividends in the group. We expect Invesco's payout ratio, currently at 43%, to stay around 40% going forward, supported by the firm's ability to generate at least a billion dollars in free cash flow annually for the next five years. We're unlikely, though, to see a return to the high single- to double-digit rates of annual dividend growth we saw during 2010-15, at least, that is, not for a while. Invesco raised its quarterly dividend just 4% in each of the past two calendar years, and we're likely to see similar hikes in subsequent years. With the U.S-based asset managers needing to spend more to remain competitive going forward, and the markets being a bit more volatile than the past couple of years, we believe this is a prudent move. Invesco has also been pulling back on share repurchases, freeing up capital to fund investments in the ETF operations at Source and Guggenheim, as well as to ensure that its dividend is comfortably covered.

The stock, trading at around 90% of our $40 per share fair value estimate, is starting to look attractive, but we generally prefer to see somewhat wider margins of safety with the asset managers, which are basically leveraged plays on the markets. For those investors looking for good entry points, we've generally found the best time to buy good, solid second-tier picks like Invesco is during periods of market dislocation, much like we saw with the Brexit vote last year in June.