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BlackRock Remains a Top Industry Pick

Greggory Warren, CFA

Greggory Warren: While BlackRock's fourth-quarter earnings might have been a bit of a disappointment on the bottom line, the company reported better AUM and organic growth numbers than most were expecting. 

Looking at the preliminary AUM numbers for most of the other asset managers that have reported so far, the company did a much better job holding onto assets and actually had better organic growth as a group as a whole. iShares continues to be the biggest generator flows within the ETF market, picking up as much in assets as its next five largest competitors combined during 2018. We expect the company to continue to maintain its market share of 40% in the U.S., and 37% globally as we move forward, with the ETF industry expected to grow anywhere from 8 to 12% organically over the next five years. 

As for the rest of BlackRock's business, its active equity operations continue to struggle, but with just less than $2 billion in outflows during the fourth quarter from that operation, we think that it's at least holding its own. BlackRock did see a large exit of institutional equity index business during the third and fourth quarters of last year, as large institutional clients, especially in the age of the Pacific region, reallocated their assets away from equities. The fortunate thing for the firm is that it has iShares to sort of cover up the outflows that hit it from those operations. 

The revenue line, fourth-quarter, full-year revenue was down on both counts. We're expecting to see pressure during the coming year, given where asset levels already started, and the fact that fee rates are lower than they were a year ago. From a profitability basis, the company closed out the year with operating margins of around 39.3%. That's pretty good considering all the headwinds it's been facing. 

As we move forward, BlackRock continues to be the only U.S.-based asset manager we cover, where we're projecting an increase in margins over time. Our best case scenario for the rest of the industry is that margins stay flat. As for capital allocation, the company bought back a significant amount of share during the year, reducing its share count overall by about 3%. BlackRock has also increased its quarterly dividend twice in the past year, with its current dividend for 2019 equivalent to about a 3.2% yield. 

BlackRock continues to be one of our top picks for the industry with wide-moat rated T. Rowe Price being the only other name we'd recommend for long-term investors.