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Shares of Waddell & Reed Financial Inc. declined 1.4% following the release of its third-quarter 2017 results. Earnings of 45 cents per share outpaced the Zacks Consensus Estimate of 40 cents. However, it compared unfavorably with the year-ago quarter’s earnings of 65 cents.
Apart from dismal year-over-year performance, the fall in share price reflects investors’ pessimism over Waddell & Reed’s decision to cut quarterly dividend by more than 45%.
Results were adversely impacted by lower revenues and a rise in expenses. Also, despite higher gross sales and a fall in net outflows during the quarter, assets under management (AUM) continued to decline. Nevertheless, a solid balance sheet position was a positive for the company.
Net income attributable to Waddell & Reed totaled $38 million, down 29.5% from the prior-year quarter.
AUM & Revenues Fall, Expenses Rise
Operating revenues for the quarter decreased 4.5% year over year to $289.4 million, reflecting a decline in all components. However, it surpassed the Zacks Consensus Estimate of $285.4 million.
Gross sales increased 14.2% year over year to $2.88 billion. Redemptions declined 23.5% to $5.67 billion. Also, net outflows were $2.79 billion at the quarter end, down from $4.89 billion at the end of the prior-year quarter.
Operating expenses rose 2.2% year over year to $234.4 million. The increase was primarily due to a higher compensation and related costs, and sub-advisory fees.
Operating margin was 19%, down from 24.3% a year ago.
As of Sep 30, 2017, AUM totaled $80.90 billion, reflecting a decline of 4.9% from the Sep 30, 2016 level.
As of Sep 30, 2017, the company’s cash and cash equivalents as well as investment securities totaled $923.1 million. Long-term debt was $94.8 million and stockholders’ equity was $870.3 million.
Performance of Distribution Channels
At the Retail Broker-Dealer channel, gross sales remained stable year over year at $1.02 billion. However, net outflows totaled $1.23 billion, increasing from the year-ago quarter figure of $712 million.
At the Retail Unaffiliated Distribution channel, gross sales surged 35.6% year over year to $1.90 billion. Also, net outflows were $483 million, down 85.6%.
Gross sales at the Institutional channel were $68 million, declining 62.2% from the year-ago quarter. The segment witnessed net outflows of $1.07 billion, up 27.8% from the prior-year quarter.
Update on Capital Deployment
Waddell & Reed bought back 190.1 million shares for $3.6 million during the quarter. The company returned a total of $42.1 million to its shareholders in the form of dividends and share repurchases during the quarter.
Further, as part of its regular assessment of the return of capital to stockholders, management intends to implement a revised capital return policy. This will give Waddell & Reed greater financial flexibility to invest in business, maintain a strong balance sheet and continue providing competitive return to stockholders.
Therefore, the Board lowered the quarterly dividend on Class A common stock to 25 cents per share. This dividend will be paid on Feb 1, 2018 to stockholders on record as of Jan 11, 2018.
Additionally, the company’s capital plan includes an authorization to repurchase $250 million worth shares over the next two years.
Our Viewpoint
Waddell & Reed has been facing pressure on its revenues, which will continue to hamper its financials in the near term. A declining trend in AUM is another key concern. Although the company is taking initiatives through Project E to boost its top line, it will take a while to witness a rebound.
Nevertheless, expenses remain manageable. Also, its continued investments in the Retail-Broker Dealer channel might help boost revenues and AUM, going forward.
Waddell & Reed Financial, Inc. Price, Consensus and EPS Surprise
Performance of Other Investment Managers and Upcoming Release
The Blackstone Group L.P. (BX - Free Report) reported third-quarter 2017 economic net income of 69 cents per share, which beat the Zacks Consensus Estimate of 57 cents. Improvement in revenues largely boosted earnings. However, a rise in expenses was an undermining factor.
BlackRock, Inc. (BLK - Free Report) reported third-quarter 2017 adjusted earnings of $5.92 per share, which outpaced the Zacks Consensus Estimate of $5.59. Results benefited from improvement in revenues, rise in AUM and steady long-term inflows. However, increase in operating expenses acted as a headwind.
Among other investment managers, Invesco ltd. (IVZ - Free Report) is slated to report results on Oct 26.
Zacks' Hidden Trades
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Why Waddell & Reed (WDR) Stock Fell Despite Q3 Earnings Beat
Shares of Waddell & Reed Financial Inc. declined 1.4% following the release of its third-quarter 2017 results. Earnings of 45 cents per share outpaced the Zacks Consensus Estimate of 40 cents. However, it compared unfavorably with the year-ago quarter’s earnings of 65 cents.
Apart from dismal year-over-year performance, the fall in share price reflects investors’ pessimism over Waddell & Reed’s decision to cut quarterly dividend by more than 45%.
Results were adversely impacted by lower revenues and a rise in expenses. Also, despite higher gross sales and a fall in net outflows during the quarter, assets under management (AUM) continued to decline. Nevertheless, a solid balance sheet position was a positive for the company.
Net income attributable to Waddell & Reed totaled $38 million, down 29.5% from the prior-year quarter.
AUM & Revenues Fall, Expenses Rise
Operating revenues for the quarter decreased 4.5% year over year to $289.4 million, reflecting a decline in all components. However, it surpassed the Zacks Consensus Estimate of $285.4 million.
Gross sales increased 14.2% year over year to $2.88 billion. Redemptions declined 23.5% to $5.67 billion. Also, net outflows were $2.79 billion at the quarter end, down from $4.89 billion at the end of the prior-year quarter.
Operating expenses rose 2.2% year over year to $234.4 million. The increase was primarily due to a higher compensation and related costs, and sub-advisory fees.
Operating margin was 19%, down from 24.3% a year ago.
As of Sep 30, 2017, AUM totaled $80.90 billion, reflecting a decline of 4.9% from the Sep 30, 2016 level.
As of Sep 30, 2017, the company’s cash and cash equivalents as well as investment securities totaled $923.1 million. Long-term debt was $94.8 million and stockholders’ equity was $870.3 million.
Performance of Distribution Channels
At the Retail Broker-Dealer channel, gross sales remained stable year over year at $1.02 billion. However, net outflows totaled $1.23 billion, increasing from the year-ago quarter figure of $712 million.
At the Retail Unaffiliated Distribution channel, gross sales surged 35.6% year over year to $1.90 billion. Also, net outflows were $483 million, down 85.6%.
Gross sales at the Institutional channel were $68 million, declining 62.2% from the year-ago quarter. The segment witnessed net outflows of $1.07 billion, up 27.8% from the prior-year quarter.
Update on Capital Deployment
Waddell & Reed bought back 190.1 million shares for $3.6 million during the quarter. The company returned a total of $42.1 million to its shareholders in the form of dividends and share repurchases during the quarter.
Further, as part of its regular assessment of the return of capital to stockholders, management intends to implement a revised capital return policy. This will give Waddell & Reed greater financial flexibility to invest in business, maintain a strong balance sheet and continue providing competitive return to stockholders.
Therefore, the Board lowered the quarterly dividend on Class A common stock to 25 cents per share. This dividend will be paid on Feb 1, 2018 to stockholders on record as of Jan 11, 2018.
Additionally, the company’s capital plan includes an authorization to repurchase $250 million worth shares over the next two years.
Our Viewpoint
Waddell & Reed has been facing pressure on its revenues, which will continue to hamper its financials in the near term. A declining trend in AUM is another key concern. Although the company is taking initiatives through Project E to boost its top line, it will take a while to witness a rebound.
Nevertheless, expenses remain manageable. Also, its continued investments in the Retail-Broker Dealer channel might help boost revenues and AUM, going forward.
Waddell & Reed Financial, Inc. Price, Consensus and EPS Surprise
Waddell & Reed Financial, Inc. Price, Consensus and EPS Surprise | Waddell & Reed Financial, Inc. Quote
Currently, Waddell & Reed carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Performance of Other Investment Managers and Upcoming Release
The Blackstone Group L.P. (BX - Free Report) reported third-quarter 2017 economic net income of 69 cents per share, which beat the Zacks Consensus Estimate of 57 cents. Improvement in revenues largely boosted earnings. However, a rise in expenses was an undermining factor.
BlackRock, Inc. (BLK - Free Report) reported third-quarter 2017 adjusted earnings of $5.92 per share, which outpaced the Zacks Consensus Estimate of $5.59. Results benefited from improvement in revenues, rise in AUM and steady long-term inflows. However, increase in operating expenses acted as a headwind.
Among other investment managers, Invesco ltd. (IVZ - Free Report) is slated to report results on Oct 26.
Zacks' Hidden Trades
While we share many recommendations and ideas with the public, certain moves are hidden from everyone but selected members of our portfolio services. Would you like to peek behind the curtain today and view them?
Starting now, for the next month, I invite you to follow all Zacks' private buys and sells in real time from value to momentum...from stocks under $10 to ETF to option movers...from insider trades to companies that are about to report positive earnings surprises (we've called them with 80%+ accuracy). You can even look inside portfolios so exclusive that they are normally closed to new investors.
Click here for Zacks' secret trade>>