We have upgraded our recommendation on Invesco Ltd. (IVZ - Analyst Report) to ‘Neutral’ from ‘Underperform’ to reflect the recent rise in assets under management (AUM) along with the gradually stabilizing equity markets. Moreover, we believe that the company is well-positioned to benefit from improved global investment flows. Nevertheless, volatile U.S. dollar, higher level of debt and increasing competition remain matters of concern.
Asset inflows remain a positive for Invesco. Over the last couple of months, the company witnessed a rise in AUM, primarily resulting from encouraging market returns, favorable foreign exchange and total net inflows. Given the current stabilizing equity markets, we anticipate strong asset inflows to be a significant positive catalyst in the near term.
Invesco remains focused on taking advantage of the steady growth in established markets and the rapid growth in emerging markets. In September 2012, the company announced the formation of the joint venture (JV) with an Indian asset management firm – Religare Asset Management Co. – through a 49% stake buy. Moreover, in terms of products, Invesco offers a wide array of traditional to alternative products to suit client requirements.
In addition, Invesco is an asset for yield-seeking investors. In April 2012, the company hiked its quarterly dividend by 41% over the prior quarter to 17.25 cents per share and maintained the same level. Since 2009, the company has been increasing dividend every year. Moreover, in the first half of 2012, the company repurchased shares worth $150.0 million. The extensive capital deployment activities are expected to boost investors’ confidence in the stock.
However, the ever rising operating expenses remain a concern for Invesco. Though the trend reversed in the second half of 2011, there has been continuous increase in operating expenses. Additionally, although the company has adopted a prudent approach to reduce its costs and intends to continue its expense management, the impact is not expected to be felt in the near term.
Further, high debt level of the company could restrict it from procuring additional finance for working capital, capital expenditures, acquisitions, debt service requirements or other purposes. Also, Invesco could be further exposed to unfavorable economic and industry conditions, which combined with its high debt obligation, might drag the company to a relatively disadvantageous position.
Invesco currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. One of its peers, BlackRock, Inc. (BLK - Analyst Report) retains a Zacks #2 Rank (short-term Buy rating).