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AUM Growth and Acquisitions Aid Federated (FHI), High Costs Ail
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Federated Hermes, Inc.’s (FHI - Free Report) continued strategic acquisition of money market assets supports assets under management (AUM) growth. However, escalating expenses and stringent regulations are likely to affect its performance. Significant dependence on net investment advisory fees and a rise in fee waivers are worrisome.
Acquiring money market assets depicts the buoyancy of Federated in the money market business, particularly under the prevailing pressure for money market funds amid stringent regulations. Increased money market AUM will furnish the company with various new fund offerings that would benefit its clients.
In the last few years, FHI has inked strategic deals and thereby expanded operations in strategic markets. The buyout of C.W. Henderson and Associates, Inc. expands its separately managed account business. Its inorganic growth efforts are expected to drive average AUM. Our estimate for average AUM reflects year-over-year increase of 9.5%, 0.5% and 7.6% in 2023, 2024 and 2025, respectively.
Given Federated’s robust balance sheet, its capital distributions seem sustainable. The company had a share repurchase plan in place of up to 5 million shares. As of Sep 30, 2023, 1.4 million shares remained under the current authorization. Further, in October 2023, it authorized an additional share repurchase program of up to 5 million shares with no expiration date.
Apart from share buybacks, the company has regularly paid dividends since its initial public offering in 1998. It also pays special dividends, the latest being $1 per share paid in 2020. Also, in April 2023, the company sequentially hiked its quarterly dividend by 3.7% to 28 cents per share. These are likely to increase shareholder value and boost investor confidence in the stock.
However, Federated’s rising expenses over the years are concerning. Going forward, any expected increase in distribution expenses and new hires might escalate the cost base, hindering bottom-line growth. Also, as the company operates in a strictly regulated investment management business, it runs the risk of any increase in compliance-related fees. Our estimate for total expenses indicates an 11.3% rise in 2023.
FHI has been waiving fees in some money market funds to enable certain funds to maintain positive or zero net yields with the pace of such waivers rising of late. While the company indicated that higher short-term rates would benefit money market funds beyond waiver relief, we believe that the ongoing acceleration in waived fees might affect the company’s top-line performance in the near term.
Net investment advisory fees contributed a substantial portion to the total revenues of Federated, comprising 68.7% in the third quarter of 2023. Significant fluctuations in the fair value of securities held by, or the level of redemptions from, the funds or other products advised by the company may materially affect the amount of managed assets, thus posing a hindrance to its revenues and profitability.
Shares of this Zacks Rank #3 (Hold) company have lost 12.1% in the past six months against the industry’s 16.9% growth.
CSWC’s earnings estimates for fiscal 2023 have been revised 2.7% upward over the past 60 days. In the past three months, its shares have risen 2.9%.
The Zacks Consensus Estimate for JHG’s current-year earnings has been revised 1.3% upward over the past 30 days. Its shares have gained 6.9% in the past three months.
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AUM Growth and Acquisitions Aid Federated (FHI), High Costs Ail
Federated Hermes, Inc.’s (FHI - Free Report) continued strategic acquisition of money market assets supports assets under management (AUM) growth. However, escalating expenses and stringent regulations are likely to affect its performance. Significant dependence on net investment advisory fees and a rise in fee waivers are worrisome.
Acquiring money market assets depicts the buoyancy of Federated in the money market business, particularly under the prevailing pressure for money market funds amid stringent regulations. Increased money market AUM will furnish the company with various new fund offerings that would benefit its clients.
In the last few years, FHI has inked strategic deals and thereby expanded operations in strategic markets. The buyout of C.W. Henderson and Associates, Inc. expands its separately managed account business. Its inorganic growth efforts are expected to drive average AUM. Our estimate for average AUM reflects year-over-year increase of 9.5%, 0.5% and 7.6% in 2023, 2024 and 2025, respectively.
Given Federated’s robust balance sheet, its capital distributions seem sustainable. The company had a share repurchase plan in place of up to 5 million shares. As of Sep 30, 2023, 1.4 million shares remained under the current authorization. Further, in October 2023, it authorized an additional share repurchase program of up to 5 million shares with no expiration date.
Apart from share buybacks, the company has regularly paid dividends since its initial public offering in 1998. It also pays special dividends, the latest being $1 per share paid in 2020. Also, in April 2023, the company sequentially hiked its quarterly dividend by 3.7% to 28 cents per share. These are likely to increase shareholder value and boost investor confidence in the stock.
However, Federated’s rising expenses over the years are concerning. Going forward, any expected increase in distribution expenses and new hires might escalate the cost base, hindering bottom-line growth. Also, as the company operates in a strictly regulated investment management business, it runs the risk of any increase in compliance-related fees. Our estimate for total expenses indicates an 11.3% rise in 2023.
FHI has been waiving fees in some money market funds to enable certain funds to maintain positive or zero net yields with the pace of such waivers rising of late. While the company indicated that higher short-term rates would benefit money market funds beyond waiver relief, we believe that the ongoing acceleration in waived fees might affect the company’s top-line performance in the near term.
Net investment advisory fees contributed a substantial portion to the total revenues of Federated, comprising 68.7% in the third quarter of 2023. Significant fluctuations in the fair value of securities held by, or the level of redemptions from, the funds or other products advised by the company may materially affect the amount of managed assets, thus posing a hindrance to its revenues and profitability.
Shares of this Zacks Rank #3 (Hold) company have lost 12.1% in the past six months against the industry’s 16.9% growth.
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Finance Stocks Worth a Look
A couple of better-ranked stocks from the finance space are Capital Southwest (CSWC - Free Report) and Janus Henderson Group Plc (JHG - Free Report) . Both companies currently carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
CSWC’s earnings estimates for fiscal 2023 have been revised 2.7% upward over the past 60 days. In the past three months, its shares have risen 2.9%.
The Zacks Consensus Estimate for JHG’s current-year earnings has been revised 1.3% upward over the past 30 days. Its shares have gained 6.9% in the past three months.