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On Mar 28, 2013, we reaffirmed our Neutral recommendation on Invesco Ltd. (IVZ - Analyst Report) based on its modest earnings performance, increasing asset inflows and sound capital deployment actions. However, continuously rising expenses, volatile U.S. dollar and higher level of debt are likely to mar the profitability of this Zacks Rank #3 (Hold) stock.

Why the Neutral Stance?

Though Invesco’s fourth-quarter 2012 earnings fared better than the prior quarter earnings, it had marginally missed the Zacks Consensus Estimate. Lower-than-expected quarterly results came on the back of an increase in operating costs, partly offset by higher net revenue. Further, improved AUM and a stable balance sheet position were the tailwinds.

In addition, in the past 60 days, there was a marginal downward estimate revision for 2013. However, estimates for 2014 have slightly improved over the same period.

Asset inflows at Invesco have witnessed increasing trends over the past several quarters. With stabilizing equity markets, asset inflows are anticipated to contribute significantly to earnings growth. Also, Invesco is an asset for yield-seeking investors. In Apr 2012, the company hiked its quarterly dividend by 41% over the prior quarter to $0.1725 per share and maintained the same level ever since. Moreover, in 2012, the company repurchased shares worth $265.0 million and has nearly $467 million shares left to be repurchased under its existing authorization.

Yet, elevated expenses remain a concern for Invesco. Though the company has adopted a prudent approach to reduce its costs over the last few years and intends to continue with its expense management initiatives, the impact is not expected to be felt in the near term. Further, the volatility in the financial markets is expected to continue, in spite of signs of economic recovery, which in turn could limit the upward potential of the company’s share price going forward.

Further, Invesco’s high debt level might put the company in a disadvantageous position if economic conditions worsen.

Other Stocks to Consider

Other stocks that are performing well and are worth considering in the same sector include Apollo Global Management, LLC (APO - Snapshot Report), Lazard Ltd. (LAZ - Analyst Report) and Affiliated Managers Group Inc. (AMG - Analyst Report). Apollo and Lazard hold a Zacks Rank #1 (Strong Buy) whereas Affiliated Managers retains a Zacks Rank #2 (Buy).
 

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