Shares of BlackRock (NYSE:BLK) are currently hovering about 30% lower from their November 2021 highs, with the tough capital markets environment severely impacting the company’s performance. That said, BlackRock has managed to navigate the ongoing unrest in the markets rather well while continuing to increase the amount of capital it returns to shareholders. With its earnings also set to see a strong rebound as equities are on the rise, there is a compelling investment case for the stock. Accordingly, I am bullish on BLK.
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What’s Keeping BlackRock Stock Beaten Down?
At around $675/share, BlackRock stock currently remains beaten down from its past highs of around $973/share. The reason behind this decline is that, as is the case with all asset management firms, the ongoing restlessness in the capital markets is unfavorable for BlackRock’s business model.
Basically, asset management firms like BlackRock tend to suffer during uncertain times in the capital markets because their revenues are directly tied to the value of the assets they manage. As the value of stocks in the market decline and the value of assets under management (AUM) decreases, the fees earned by Blackrock also decrease. This is because asset management fees are typically calculated as a percentage of AUM, so a decline in the value of assets means a decline in fees earned.
Another factor that I suggest you consider here is that during tough macroeconomic environments like the one we are currently experiencing, investors tend to become more risk-averse, leading to a decrease in demand for Blackrock’s investment products (e.g., ETFs). During particularly depressing times, investors may choose to withdraw their funds from BlackRock’s products, further decreasing AUM and revenue.
Unfortunately, this holds particularly true for the company since BlackRock is by far the largest asset management firm in the world. Since its AUM base is exposed to every single corner of the market, it’s impossible for BlackRock to avoid or hedge against the systematic risk of global markets.
Hence, you can see why investors are cautious with BlackRock stock, given that a potential upcoming recession could severely impact the company’s performance.
Performance Should Rebound in Fiscal 2023
BlackRock’s performance took a notable hit in recent quarters, but it should improve this year. Specifically, in line with the above explanation, BlackRock’s AUM in Fiscal 2022 fell by 14% to $8.59 trillion, leading to an 8% decline in revenues and a 12% decline in net income.
In its most recent Q1-2023 results, BlackRock’s AUM was also 5% lower compared to Q1 2022, mainly due to the value of equities remaining lower compared to the prior-year period, even though the company attracted $110 billion in net inflows during the quarter. However, AUM rose by about 5.7% sequentially, ending the quarter at $9.09 trillion, as equities did show signs of recovery during this three-month interval.
With all major indices performing well in the first month of Q2, I believe that it’s reasonable to expect that BlackRock’s performance will significantly improve in Fiscal 2023. This is unless, of course, the market takes a negative turn in the second half of the year.
Dividends & Buybacks Get a Boost
Besides a potentially improving performance this year, another catalyst that contributes to the stock’s bullish case is the company’s commitment to rewarding shareholders through growing dividends and share buybacks.
BlackRock has increased its dividend for 14 consecutive years. Also, it’s worth noting that despite the economic downturn during the Great Financial Crisis, BlackRock managed to maintain its dividend and did not reduce it. In fact, BlackRock has never cut its dividend since the first payment was made back in 2003. This remarkable achievement speaks to its resilience and strength even in challenging economic times.
The most recent dividend increase of just 2.5% was certainly underwhelming, but it makes sense that management chooses to be prudent while uncertainty persists. In the meantime, BlackRock’s dividend compound annual growth rate over the past decade stands at a sufficient 12.5%. The 2.9% yield also appears attractive, given the relatively rapid pace of dividend growth over the years.
Regarding its share buybacks, BlackRock has been repurchasing larger batches of stock lately, taking advantage of its reduced share price to shrink its share count. Last year, the company repurchased $2.33 billion worth of stock, a considerable increase from the $1.49 billion repurchased in Fiscal 2021. In Q1 2023, BlackRock also repurchased a substantial $375 million worth of stock.
Is BLK Stock a Buy, According to Analysts?
Turning to Wall Street, BlackRock has a Moderate Buy consensus rating based on nine Buys and four Holds assigned in the past three months. Nonetheless, at $757.31, the average BlackRock stock forecast implies 12.2% upside potential.
The Takeaway
With BlackRock stock still trading ~30% lower from its past highs, I believe the stock is worth considering. Equities have been gaining ground in recent months, which should positively impact the company’s revenue and profitability this year. In the meantime, BlackRock offers a growing dividend and an appealing dividend yield while continuously buying back shares. Still, it’s best to exercise caution as potential challenges may emerge if the economy enters a recession in the near future.
