Morgan Stanley Benefits From Acquisitions

While Morgan Stanley MS reported a sequential decline in revenue, results for the second quarter were still exceptional, and the company has positioned itself for multiple secular tailwinds. Morgan Stanley reported net income to common shareholders of $3.4 billion, or $1.85 per diluted share, on $14.8 billion of net revenue. The company's return on tangible equity for the quarter was 18.6%. We don't anticipate making a significant change to our $70 fair value estimate for narrow-moat Morgan Stanley. Net revenue declined 6% sequentially, despite Morgan Stanley benefiting from a full quarter of revenue from Eaton Vance, which was acquired in March 2021. Wealth and investment management revenue as a group increased about 7% sequentially, while institutional securities revenue declined 17%. The decline in institutional securities revenue mimicked other investment banks that also reported declines in revenue from record first-quarter results. Despite the sequential decline, institutional securities revenue in the recent quarter was still about 40% higher than the 2018-19 quarterly average, and we continue to believe that results will be relatively strong for the next several quarters, as the economy has a positive trajectory that is a boon for investment banking revenue, while there's enough political and economic uncertainty to sustain trading revenue. On the capital front, Morgan Stanley recently announced that it's doubling its dividend to $0.70 from $0.35 per quarter and has a $12 billion share repurchase authorization through June 30, 2022. The company had a standardized common equity Tier 1 ratio of 18.4% at the end of the quarter, which is more than 3 percentage points above the company's internal target. This means that not only can Morgan Stanley return capital equal to our forecast of more than $10 billion of net income annually but can also return an additional $10 billion of excess capital that is currently on its balance sheet.

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