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Stock Analysis & Ideas

Blackrock: The Most Influential Company in Finance

Founded in 1988, New York-based BlackRock (BLK) is a global investment manager and offers investment management, risk management, and advisory services for its clients.

With over $10 trillion in assets under management, its CEO Laurence Fink is considered one of the most influential people in the world of finance. This seems unlikely to change, at least not anytime soon. As a result, we are bullish on the stock.

Smart Score Rating

Blackrock earns a 9 out of 10 on the TipRanks Smart Score rating system. This means that the company is likely to be a solid performer going forward.

In fact, stocks with a perfect score have, on average, generated 78.8% alpha over the S&P 500 since 2016. Although not a perfect 10 at the moment, 9 out of 10 is close and is still likely to outperform.

Some of the driving forces behind the high rating for Blackrock is strong overall bullish investor sentiment. Analysts, bloggers, retail investors, and hedge funds have a favorable view of the company. In addition, its return on equity is currently 16.2%, which is very solid.

DuPont Analysis

To highlight the company’s quality, we will break down its return on equity into three different parts: net profit margin, asset turnover, and leverage. By multiplying the three metrics together, we arrive at the return on equity figure.

An increase in any of the figures (all else being equal) will increase ROE. Thus, it’s important to note if an increase is simply coming from increasing leverage because that means the company is simply taking on more debt instead of improving operations.

For Blackrock, the trends are as follows:

Image created by the author

What is interesting about Blackrock is that its ROE has increased in the past few years while leverage (equity multiplier) has significantly decreased. This has been attributable to a steady profit margin and an increasing asset turnover, meaning the company became more efficient because it was able to generate more revenue relative to its assets.

In essence, leverage was reduced by 42% while efficiency more than doubled. That is truly a sign of a well-run business.

Dividends

Blackrock has a 2.33% dividend yield, which is above the sector average of 1.63%. When taking a look at its payout ratio of 44%, its dividend appears to be safe.

Looking at its historical dividends, we can see that its yield range has trended downwards in the past several years.

At 2.33%, the company’s dividend is near the low end of its range, implying that the stock price is trading at a premium relative to the yields investors have seen in the past.

Valuation

BLK stock is trading at what we think is a reasonable valuation. Forward estimates for GAAP earnings per share are $41.52 and $45.60 for 2022 and 2023, respectively. This implies forward P/E ratios of 17.8 and 16.2, respectively.

BLK has historically traded at just over an 18x forward earnings multiple, implying that you could be buying a good company at a fair price.

Wall Street’s Take

Turning to Wall Street, Blackrock has a Strong Buy consensus rating, based on eight Buys, two Holds, and zero Sells assigned in the past three months. The average Blackrock price target of $966.90 implies 30.6% upside potential.

Final Thoughts

Blackrock has a lot going for it at the moment. It has a vast empire of assets under management, numbering over $10 trillion, much higher than the GDP of most countries in the world.

In addition, it has become more efficient at generating revenue while keeping profit margins steady and reducing leverage. Furthermore, it has the backing of Wall Street analysts who assign an upside potential of 30%. Finally, it is a good, growing company that is trading at what seems to be a fair valuation.

As a result, it’s easy to see why it has a 9 out of 10 Smart Score and why we are bullish on the stock.

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