tiprankstipranks
Morgan Stanley Stock is a Dividend-Growth Powerhouse
Stock Analysis & Ideas

Morgan Stanley Stock is a Dividend-Growth Powerhouse

Story Highlights

Morgan Stanley’s earnings are being negatively impacted by the ongoing turmoil in capital markets. Still, its latest results showcased relative strength in fixed-income securities. Despite the challenges, Morgan Stanley remains a capital return powerhouse.

Shares of Morgan Stanley (MS) have declined by roughly 16.5% this year. The stock’s decline and Morgan Stanley’s dividend increases in the meantime have lifted the dividend yield to 3.8%. With ample room for dividend hikes to be sustained, Morgan Stanley is likely to adequately meet dividend growth investors’ needs. I am bullish on the stock.

Morgan Stanley is a financial holding company that provides a vast range of products and services to institutions, individuals, corporations, and governments worldwide.

Its expertise lies in Institutional Securities & Wealth Management as well as Investment Management. Particularly, its root offerings comprise capital raising and financial advisory services, underwriting of debt, equity, and other securities. The company also provides advisory services on mergers and acquisitions.

On the one hand, some of Morgan Stanley’s operations are being significantly impacted by the ongoing market turmoil. Investors are reluctant to deploy capital in the current environment, while businesses are unlikely to pursue, say, an IPO during a period of depressed valuations.

On the other hand, Morgan Stanley’s latest results displayed relative strength in some of its other divisions, while the company remains a capital return powerhouse.

Q2 Results Showed Strength Despite Underlying Challenges 

Last week, Morgan Stanley reported its Q2-2022 results, with numbers coming in rather solid despite weakness in the company’s Investment Banking segment. Specifically, the segment’s revenues plummeted by 55%. It makes sense in the current environment, as elevated volatility levels led clients to delay strategic actions and new issue activity.

This makes for a good comparison with last year’s boosted investment banking revenues as a result of the euphoria at the time, including multiple businesses pursuing underwriting services and access to the public markets.

However, with investors seeking shelter in safer assets, the company saw its Fixed Income revenues surge 49%, partly offsetting Investment Banking’s softened performance.

That balanced the overall results, resulting in total net revenues coming in at $13.1 billion, just 11% lower versus Q2 2021. Following the top line’s downfall and lower margins, adjusted EPS fell 24% to $1.44.

Morgan Stanley’s Capital Returns Remain Vigorous 

Despite the company’s recent bottom-line weakness due to the current turmoil in markets, Morgan Stanley remains profitable enough to keep returning substantial amounts of cash to shareholders. Following last year’s massive 100% dividend per share increase, the company announced a 10.7% increase in the dividend for this year, whose quarterly rate is now standing at $0.775.

This, combined with the stock’s decline, has led to shares now yielding roughly 3.8% on an annualized basis, which is one of the highest yields the stock has ever traded at.

Additionally, the company has been a heavy buyer of its own stock. During the quarter, it repurchased $2.7 billion worth of shares, reducing its total share count by 6% year-over-year.

In fact, management has sometimes exploited the company’s cheap valuation to buy back and retire more than 10% of its outstanding shares since 2014 – and this includes the share count jumping by 14% as a result of the acquisitions of E-trade and Eaton Vance last year.

The current rate of buybacks implies a “buyback yield” of 7.7%, which along with the 3.8% dividend yield, provide a total investor yield in the double-digits.

Steep Valuation Compared to Peers, but It’s Worth It

Morgan Stanley did not provide specific guidance, but consensus EPS estimates point towards $6.65 for Fiscal 2022, implying a year-over-year decline of 19.1%. From a next-12-month expected EPS standpoint, the stock is the most expensive amongst its peers.

At a forward P/E of 11.2x, shares trade at a premium to its investment bank peer Goldman Sachs (GS), with a forward P/E of 8.5x, and other banks in general, such as Bank of America (BAC), JPMorgan Chase (JPM), and Wells Fargo (WFC), which trade at a forward P/Es of 9.7x, 9.3x, and 8.6x, respectively.

In my view, the premium multiple is due to the company’s aggressive capital returns that provide investors with an additional incentive to purchase the stock relative to its peers. For instance, JPMorgan announced that it has temporarily suspended its buybacks.

Wall Street’s Take on MS Stock

Turning to Wall Street, Morgan Stanley has a Moderate Buy consensus rating based on 13 Buys and five Holds assigned in the past three months. At $91.88, the average Morgan Stanley price target implies 12.3% upside potential.

The Takeaway: Reasonably-Valued Stock for Dividend-Growth Investors

Morgan Stanley should be a worthwhile stock in any dividend-growth portfolio. The pace of dividend increases remains quite satisfactory, while the yield has been pushed high enough that it is hard to ignore.

The dividend should provide investors with a wide margin of safety combined with the current buyback yield, even if the stock appears relatively overvalued against its peers.

Disclosure

Trending

Name
Price
Price Change
S&P 500
Dow Jones
Nasdaq 100
Bitcoin

Popular Articles