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Federated Rides on Acquisitions and AUM Growth, High Costs Ail
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Federated Hermes, Inc.’s (FHI - Free Report) continued strategic acquisition of money market assets supports assets under management (AUM) growth. However, escalating expenses and a significant dependence on net investment advisory fees are worrisome.
Shares of this Zacks Rank #3 (Hold) company have gained 4.4% compared with the industry’s growth of 8.5% in the past three months.
Image Source: Zacks Investment Research
Factors Driving Federated Stock
Acquiring money market assets depicts the buoyancy of Federated in the money market business. In the first half of 2024, money market assets witnessed significant growth. Increased money market AUM will provide the company with various new fund offerings that would benefit its clients.
In the last few years, the company has inked strategic deals and expanded operations in the strategic markets. The buyout of C.W. Henderson and Associates, Inc. expands its separately managed account business. The company continues to seek alliances and acquisitions to expand its business globally. Its average AUM witnessed a five-year (ended 2023) CAGR of 11.9%, with the uptrend continuing in the first half of 2024. The company’s inorganic growth efforts are expected to drive average AUM further.
Federated’s capital distribution activities seem encouraging. In June 2022, the company’s board of directors authorized a share repurchase program of up to five million shares of common stock. In October 2023, the company authorized an additional share repurchase program of up to five million shares with no expiration date. As of June 30, 2024, approximately two million shares remain available under the share repurchase program.
Apart from share buybacks, the company has regularly paid dividends since its initial public offering in 1998. In April 2024, the company hiked its quarterly dividend by 10.7% to 31 cents per share.
Federated has a robust balance sheet. As of June 30, 2024, the company’s long-term debt was $348 million. Its cash and other investments were $452.95 million as of the same date. Hence, given a decent liquidity position its capital distribution activities seem sustainable.
What’s Hurting Federated’s Growth?
Federated’s rising expenses over the years are concerning. Going forward, any expected increase in distribution expenses and new hires might escalate the cost base further. Management expects advertising and promotion activities to intensify in the second half of 2024 compared with the first half, leading to higher costs. These increases in expenses are likely to keep the bottom line under pressure in the near term.
Net investment advisory fees contribute a substantial portion to the total revenues of Federated. As of June 30, 2024, it comprised 66.2% of total revenues. Significant fluctuations in the fair value of securities held by, or the level of redemptions from, the funds or other products advised by the company may materially affect the amount of managed assets. This will, thus, pose a hindrance to the company’s revenues and profitability.
The Zacks Consensus Estimate for JHG’s current-year earnings has been revised nearly 1% upward to $3.23 per share in the past 30 days. The company’s shares have risen 24.7% year to date.
The Zacks Consensus Estimate for HLNE’s current-year earnings has been revised 8% upward to $4.88 per share in the past 30 days. The company’s shares have risen 34.7% year to date.
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Federated Rides on Acquisitions and AUM Growth, High Costs Ail
Federated Hermes, Inc.’s (FHI - Free Report) continued strategic acquisition of money market assets supports assets under management (AUM) growth. However, escalating expenses and a significant dependence on net investment advisory fees are worrisome.
Shares of this Zacks Rank #3 (Hold) company have gained 4.4% compared with the industry’s growth of 8.5% in the past three months.
Image Source: Zacks Investment Research
Factors Driving Federated Stock
Acquiring money market assets depicts the buoyancy of Federated in the money market business. In the first half of 2024, money market assets witnessed significant growth. Increased money market AUM will provide the company with various new fund offerings that would benefit its clients.
In the last few years, the company has inked strategic deals and expanded operations in the strategic markets. The buyout of C.W. Henderson and Associates, Inc. expands its separately managed account business. The company continues to seek alliances and acquisitions to expand its business globally. Its average AUM witnessed a five-year (ended 2023) CAGR of 11.9%, with the uptrend continuing in the first half of 2024. The company’s inorganic growth efforts are expected to drive average AUM further.
Federated’s capital distribution activities seem encouraging. In June 2022, the company’s board of directors authorized a share repurchase program of up to five million shares of common stock. In October 2023, the company authorized an additional share repurchase program of up to five million shares with no expiration date. As of June 30, 2024, approximately two million shares remain available under the share repurchase program.
Apart from share buybacks, the company has regularly paid dividends since its initial public offering in 1998. In April 2024, the company hiked its quarterly dividend by 10.7% to 31 cents per share.
Federated has a robust balance sheet. As of June 30, 2024, the company’s long-term debt was $348 million. Its cash and other investments were $452.95 million as of the same date. Hence, given a decent liquidity position its capital distribution activities seem sustainable.
What’s Hurting Federated’s Growth?
Federated’s rising expenses over the years are concerning. Going forward, any expected increase in distribution expenses and new hires might escalate the cost base further. Management expects advertising and promotion activities to intensify in the second half of 2024 compared with the first half, leading to higher costs. These increases in expenses are likely to keep the bottom line under pressure in the near term.
Net investment advisory fees contribute a substantial portion to the total revenues of Federated. As of June 30, 2024, it comprised 66.2% of total revenues. Significant fluctuations in the fair value of securities held by, or the level of redemptions from, the funds or other products advised by the company may materially affect the amount of managed assets. This will, thus, pose a hindrance to the company’s revenues and profitability.
Finance Stocks Worth a Look
Some better-ranked stocks in the finance sector are Janus Henderson Group plc (JHG - Free Report) and Hamilton Lane Incorporated (HLNE - Free Report) . At present, JHG sports a Zacks Rank #1 (Strong Buy) and HLNE carries a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for JHG’s current-year earnings has been revised nearly 1% upward to $3.23 per share in the past 30 days. The company’s shares have risen 24.7% year to date.
The Zacks Consensus Estimate for HLNE’s current-year earnings has been revised 8% upward to $4.88 per share in the past 30 days. The company’s shares have risen 34.7% year to date.