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Franklin Outperforms on Higher Rev

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Franklin Resources Inc.’s (BEN - Free Report) fiscal first quarter 2013 earnings reached $2.42 per share, beating the Zacks Consensus Estimate by 4 cents. Moreover, results outpaced earnings of $2.31 in the prior quarter.

Better-than-expected results came on the back of higher revenues. Moreover, increased level of assets under management (AUM) was a tailwind for the quarter. Yet, higher operating expenses were a dampener.

Net income was $516.1 million in the quarter compared with $492.1 million in the prior quarter.

Performance in Detail

Total operating revenue surged 5% sequentially to $1.90 billion, due to growth in all revenue avenues. Revenue results were also above the Zacks Consensus Estimate of $1.89 billion.

Investment management fees increased 5% sequentially to $1.2 billion, while sales and distribution fees inched up 4% sequentially to $604 million. Moreover, shareholder servicing fees surged 2% sequentially to $74.4 million, with other net revenue increasing 15% sequentially to $23.4 million.

Total operating expenses increased 2% sequentially to $1.2 billion. The upsurge mainly resulted from higher sales, distribution and marketing expenses and elevated compensation and benefits. These increases were partially offset by lower general, administrative and other expenses, reduced information systems and technology expenses and low occupancy expenses.

As of Dec 31, 2012, total AUM was $781.8 billion, up from $749.9 billion as of Sep 30, 2012, driven by market appreciation of $24.8 billion and $8.7 billion from an acquisition.

Simple monthly average AUM of $763.6 billion during the quarter climbed 5% sequentially. Net new flows were $0.3 billion versus $2.9 billion in the prior quarter.

Balance Sheet Position

As of Dec 31, 2012, cash and cash equivalents along with investments were $7.6 billion compared with $8.4 billion as of Sep 30, 2012. Moreover, total stockholders' equity was $9.5 billion versus $9.8 billion as of Sep 30, 2012.

Capital Deployment

During the reported quarter, Franklin repurchased 0.8 million shares of its common stock for a total cost of $98 million.

Notably, during calendar year 2012, Franklin enhanced its quarterly common stock dividend by 7% to 29 cents per share. The increased dividend was paid on Dec 31 to shareholders of record as of Dec 14, 2012.

Moreover, the company announced the payment of a special cash dividend of 3 cents per share, which was paid on Dec 20 to shareholders of record as of Dec 6, 2012.

The dividend increase is part of Franklin’s long-term strategy to enhance shareholder value through prudent capital management. The strategy also includes investment in profitable businesses while sustaining financial stability and flexibility.

Our Viewpoint

Franklin's global footprint is an exceptionally favorable strategic point as its AUM is well diversified. The company is also poised to benefit from its strong balance sheet. However, regulatory restrictions and sluggish economic recovery could mar the AUM growth and increase costs. Additionally, higher expenses remain a matter of concern.

Shares of Franklin currently carry a Zacks Rank #3 (Hold). Among peers, Virtus Investment Partners, Inc. (VRTS - Free Report) carries a Zacks Rank #1 (Strong Buy), while BlackRock, Inc. (BLK - Free Report) and Lazard Ltd. (LAZ - Free Report) carry a Zacks Rank #2 (Buy).

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