Invesco Beats by a Penny

Invesco Ltd.’s (IVZ - Analyst Report) fourth-quarter adjusted earnings came in at 42 cents per share, just a cent ahead of the Zacks Consensus Estimate. However, this compares unfavorably with the adjusted earnings of 44 cents in the prior-year quarter.

On a GAAP basis, earnings came in at 44 cents per share compared with 37 cents in the year-ago quarter.

Invesco’s earnings deteriorated over the prior-year quarter, primarily due to lower net revenue and higher operating expenses. However, improved interest and dividend income and lower interest expense were among the positives. The company’s assets under management also remained healthy during the quarter.

For the full year 2011, adjusted earnings were $1.68 per share, just a penny ahead of the Zacks Consensus Estimate. The company earned $1.38 in the previous year.

Invesco’s adjusted net income decreased 1% sequentially and 9% year over year to $190.5 million.

Adjusted net revenue improved 2% sequentially but decreased 3% year over year to $716.8 million. On a year-over-year basis, revenues fell primarily due to lower investment management fees as well as reduced service and distribution fees. Also, foreign exchange rate changes had a negative impact on net revenue during the quarter. Net revenue significantly missed the Zacks Consensus Estimate of $1.02 billion.

Adjusted net revenue for the full year came in at $2.90 billion, up 15% from $2.52 billion in the previous year. Operating revenues were $4.09 billion compared with $3.49 billion in 2010.The Zacks Consensus Estimate for the full year was $4.19 billion.

Quarter in Detail

Adjusted investment management fees fell 4% both sequentially as well as year over year to $770.8 million. Service and distribution fees dropped 4% sequentially and 10% year over year to $181.1 million.

Adjusted operating expenses increased 2% sequentially and 1% year over year to $460.5 million. The increase was primarily attributable to higher employee compensation expenses, partially offset by lower marketing expenses.

Adjusted operating margin for the quarter was 35.8% compared with 36.2% in the prior quarter and 38.1% in the prior-year quarter.

Assets under Management

Assets under management (AUM) were up 5% sequentially and 1% year over year to $625.3 billion as of December 31, 2011. Average AUM for the reported quarter was $621.7 billion compared with $632.7 billion in the prior quarter and $616.0 billion in the prior-year quarter.

Long-term net inflows during the quarter were $5.6 billion compared with $3.3 billion in the prior quarter.

Dividend Update

Concurrent with the earnings release, the company declared a fourth-quarter dividend of 12.25 cents per share. The dividend will be paid on March 9, 2012, to shareholders of record as of February 23, 2012.

Share Repurchase

During the reported quarter, Invesco repurchased shares worth $103.5 million, representing 5.3 million shares. Under Invesco’s 2011 share repurchase program, the company repurchased total shares worth $436.5 million as of December 31, 2011. The company has remaining shares worth $732.0 million under its current repurchase authorization.

Our Take

Improving long-term investment performance, propelled by the gradual global equity market recovery, will likely boost the company’s operating results over the mid to long term. Although the operating leverage is expected to improve significantly over the long term due to cost control initiatives, rising operating expenses will remain a near-term headwind.

Furthermore, Invesco is poised to benefit from improved global investment flows, resulting from its broad diversification. Yet we remain concerned about volatile U.S. dollar.

Invesco currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. However, one of Invesco’s peers, The Blackstone Group (BX - Snapshot Report) retains a Zacks #2 Rank (short-term Buy rating).

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