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Growth & Income

Shares of Waddell & Reed Financial Inc. (WDR - Analyst Report) have been on the rise since this mutual fund asset manager announced better-than-expected third-quarter results in late October, including a hike in its quarterly cash dividend. This Zacks #2 Rank (Buy) currently pays a regular quarterly dividend that yields 2.7% annually.

With a decent dividend yield and an expected long-term earnings growth rate of 14.4%, Waddell & Reed looks like a promising pick for investors seeking both growth and income.

Earnings Recap

Waddell & Reed is scheduled to release its fourth-quarter results on January 29. The Zacks Consensus Estimate for the quarter is currently 58 cents per share on revenue of $302.0 million. In the year-ago fourth quarter, the company earned 47 cents.

On October 31, 2012, Waddell & Reed reported third-quarter earnings of 61 cents per share, topping the Zacks Consensus Estimate by 8.9% and the year-ago earnings by 32.6%.

Operating revenues increased 4.6% year over year to $293.4 million. Operating expenses increased 3.5% to $213.6 million, primarily due to higher underwriting and distribution expenses as well as a rise in compensation and related costs.

Furthermore, redemptions were down 28.1% from the prior-year quarter to $4.6 billion. However, inflows deteriorated significantly to $826 million in the third quarter from $1.3 billion.

As of September 30, 2012, AUM totaled $94.8 billion, up 22.3% from $77.5 billion on September 30, 2011 and 6.4% from $89.1 billion on June 30, 2012. Both increases were driven by positive market action and organic growth.

Earnings Estimates

In the past 90 days, the Zacks Consensus Estimate for 2012 has advanced 2.8% to $2.22 per share, reflecting year-over-year growth of about 8.2%. The Zacks Consensus Estimate for 2013 is currently $2.48, suggesting a year-over-year improvement of nearly 12%.

Dividend Payment

In November 2012, Waddell & Reed increased its quarterly dividend by nearly 12% to 28 cents per share. The current dividend rate affirms an annual yield of 2.7%.

Reasonable Valuation

Shares of Waddell & Reed currently trade at 14.6x 12-month forward earnings, a 2.0% discount to the peer group average of 14.9x. Its price-to-book ratio of 5.5 is 44.7% above the industry median of 3.8. Given its strong fundamentals, the valuation looks reasonable.

Waddell & Reed has been continuously outperforming the S&P 500 and 200 day moving average over the last three months. The stock has returned 38.1% over the past year, compared with the S&P 500’s return of 14.0%.

Waddell & Reed is a mutual fund asset manager offering investment management, investment product underwriting and distribution, as well as shareholder services administration. With approximately 1,760 financial advisors, the company’s diversified mutual fund portfolio includes equity, growth, international, income, value, asset allocation, fixed income and money market investment options. The company has a market cap of nearly $3.1 billion. BlackRock, Inc. (BLK) and Franklin Resources Inc. (BEN) are the other Zacks Rank #2 (Buy) stocks in the industry.


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