Published on July 10th, 2024 by Felix Martinez
Certain sectors of the stock market tend to be great sources of income. In general, low growth and low capital expenditure needs are generally characteristics of strong income stocks because companies with those characteristics lack ample growth investment opportunities for their capital.
That frees the management team to return capital to shareholders via dividends.
Financials are a great source of dividend stocks, but there is more to finance than banks. Investment managers often offer sizable dividend yields.
Artisan Partners Asset Management (APAM) is an asset manager with a high dividend yield of 6.4%. The yield is good enough to land Artisan on our list of high-dividend stocks.
This list contains about 200 stocks with yields of at least 5%, meaning they all yield at least three times that of the S&P 500.
You can download your free full list of all securities with 5%+ yields (along with important financial metrics such as dividend yield and payout ratio) by clicking on the link below:
Artisan Partners is part of our ‘High Dividend 50’ series, which covers the 50 highest-yielding stocks in the Sure Analysis Research Database.
Below, we will analyze the prospects of Artisan as an investment opportunity today.
Business Overview
Artisan is a publicly-owned investment manager. The company provides investment services to pension and profit-sharing plans, trusts, endowments, charitable organizations, governments, private funds, mutual funds, and more.
It manages equity and fixed-income portfolios with investments from all over the world. The company focuses on traditional fundamental analysis to find and select investment opportunities for its funds.
Source: Investor presentation,
As seen above, Artisan is in the bottom half of the credit risk ladder in terms of its credit focus. This affords Artisan much higher yields than investors focused on government and high-grade corporate issues, for instance, but it also carries with it increased risk.
Artisan seeks to manage that trade-off between risk and reward to generate returns for shareholders.
Artisan was founded in 1994 and is based in the US. The company produces just under a billion dollars of annual revenue and trades with a market cap of $3.2 billion.
For the first quarter of 2024, revenues amounted to $264.4 million, a 6% increase from $249.0 million in the previous quarter and a 13% increase from $234.5 million in the same quarter of the previous year. This revenue growth is primarily attributed to higher average AUM, despite declining performance fees and one fewer calendar days in the quarter.
Operating expenses also rose, reaching $186.7 million, driven by higher incentive compensation costs and increased seasonal compensation expenses, which include employer-funded retirement and healthcare contributions.
The GAAP operating margin for the March 2024 quarter was 29.4%, slightly down from 30.7% in the December 2023 quarter. The adjusted operating margin stood at 30.9%, down from 32.1% in the previous quarter but up from 29.9% in the March 2023 quarter.
GAAP net income for March 2024 was $59.5 million, translating to $0.84 per basic and diluted share, compared to $64.8 million, or $0.92 per share, in December 2023. Adjusted net income was $61.6 million, or $0.76 per adjusted share, showing a minor decline from $62.8 million, or $0.78 per adjusted share, in the prior quarter.
Growth Prospects
Given the fact that Artisan is nearly wholly reliant upon rising assets under management to generate fees and earnings, its earnings growth history is predictably spotty.
It is normal for Artisan to see rather sizable gains and losses from year to year, but importantly, the company has remained solidly profitable throughout the last decade.
We note that Artisan has seen net client outflows frequently in the past several quarters, which hurts its ability to grow in the long term.
Instead, the company is very reliant upon the values of global stock and bond markets, both of which had awful years in 2021.
Given these factors, we are currently estimating -2% earnings contraction on average in the years to come, as we see competitive headwinds persisting, and as we find the net client outflows to be somewhat worrisome.
On the plus side, the company is controlling operating expenses, and the outflows have thus far been small and manageable. Still, we think Artisan has a tough road ahead in terms of growing earnings from the ~$3 per share level estimated for 2022.
Competitive Advantages
Unfortunately for Artisan, we don’t see where it has much of a competitive advantage. Countless investment managers are available to those looking to invest their capital, and many have enormous scale and brand recognition advantages over Artisan.
The company notes that its funds perform relatively well, but it hasn’t resonated with customers.
Source: Investor presentation,
There is perhaps no better illustration of this lack of advantage than the above data on outflows and assets under management.
We believe that if Artisan had a competitive advantage, it would attract additional investor capital, not lose it. While we believe Artisan is a competent investment manager, we cannot overlook that customers are net sellers of the company’s funds.
Dividend Analysis
Artisan has paid dividends to shareholders for nine consecutive years, which is the amount of time it has been publicly-traded. However, it does not have a dividend growth streak given its dividend policy’s unique, variable nature.
Management aims to pay out 80% of the cash the company generates for the year, but given the volatile nature of its earnings performance, 80% of the cash generated can be wildly different from year to year.
It also means that the company pays a regular quarterly dividend and then typically pays a special dividend at the end of the year.
The quarterly dividends and special dividends are variable in size, so it is nearly impossible to know the total payout from year to year.
However, to its credit, Artisan’s total dividends have been huge for the past five years, from 2017 to 2023 producing a total of $33.27 in cash distributions to shareholders. With the share price at $40 today, shareholders received more than half of today’s share price in dividends in just five years.
Artisan’s payout has exceeded 100% of earnings at times in the past, but we see it under 90% for the foreseeable future. That’s very high, and it means the dividend is susceptible to cuts.
However, Artisan’s policy is to pay a variable dividend yearly, so cuts are normal and should be expected occasionally.
Where Artisan excels is in the total yield it provides investors. The current quarterly dividend alone is worth 6.4%, while any special dividends add to that total yield. That makes Artisan a very strong income stock, provided investors aren’t looking for dividend growth and are okay with the payout being cut and raised constantly.
Final Thoughts
Artisan can be seen as a leveraged player in the equity markets. The company will benefit from ballooning AUM when markets rise due to market returns and stronger client inflows.
Conversely, the company will likely perform very poorly during a bear market, as it did at the end of 2018 and in 2022. We are boosting the stock from hold to buy after Q1 results.
Returns should accrue from 8% earnings growth, the 5.4% yield, and a 2.3% headwind from the valuation.
If you are interested in finding high-quality dividend growth stocks and/or other high-yield securities and income securities, the following Sure Dividend resources will be useful:
High-Yield Individual Security Research
- 20 Highest Yielding Monthly Dividend Stocks
- 10 Super High Dividend REITs
- 5 Highest Yielding Royalty Trusts
Other Sure Dividend Resources
- Dividend Kings: 50+ years of rising dividends
- Dividend Champions: 25+ years of rising dividends
- Dividend Aristocrats: 25+ years of rising dividends and in the S&P 500
- Dividend Achievers: 10+ years of rising dividends and in the NASDAQ
- Monthly Dividend Stocks: Individual securities that pay out every month
- MLPs: List of MLPs and more
- REITs: List of REITs and more
- BDCs: List of BDCs and more