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Waddell & Reed's Project E to Aid Revenues, Outflow Hurts

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Waddell & Reed Financial, Inc.’s strategy to improve revenue through Project E initiative should support bottom-line growth in the long run. However, significant outflows and pressure on revenues remain major concerns.

Last year, Waddell & Reed initiated ‘Project E’, with an aim to reform its Retail Broker-Dealer channel. The company continues to invest in this channel by providing additional support to its advisors through training opportunities and enhanced technology tools, including compliance-related technology. These efforts will help boost revenues, inflows and assets under management (AUM), going forward.

Additionally, as part of this effort, the company is undertaking measures to control costs. Expenses have fallen at a compound annual growth rate (CAGR) of 5.1% over the last three years (2014-2016). As the company is making efforts to improve efficiency and optimize its operations, costs are expected to continue witnessing a downward trend in the next few quarters.

Further, Waddell & Reed has been steadily rewarding its shareholders through dividend hikes since 2010. Also, the company has a share repurchase program in place. The company is authorized to buy back the greater amount of $50 million of common stock or 3% of the outstanding common stock. Given a solid liquidity position and a debt-equity ratio lower than the industry, the company should be able to continue enhancing shareholders’ value through efficient capital deployment activities.

However, Waddell & Reed is witnessing a decrease in AUM. Over the last four years (2013-2016), AUM decreased at a CAGR of 14%. The downtrend is expected to continue in the next few quarters with net outflows across all distribution channels.

Moreover, Waddell & Reed is facing pressure on top line. Over the past three years (2014-2016), total revenues declined at a CAGR of 11.9%. A tough operating environment and lower sales volume are the primarily reasons for the decrease.

Also, the company’s Zacks Consensus Estimate for current-year earnings has also been revised downward over the last 60 days.

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