Though benefits from a stabilizing economy and gradually-improving interest-rate scenario in the past had positioned the investment-management industry well, investment managers might have been affected by the Fed’s rate cuts in 2019 and the first half of 2020, along with lower expectations for GDP growth and inflation with higher unemployment rate this year on the coronavirus mayhem. Nevertheless, the central bank projects economic growth for the next two years.
Additionally, most investment managers have waived off majority of their fees with the rates rising since 2016. This decline in fee waivers has aided companies’ top-line growth. Moreover, most asset managers recorded solid revenue growth in the first quarter of 2020 on increase in assets under management (AUM), despite escalating compliance and technology costs.
Also, performance of equity markets has been favorable, quarter to date, as reflected by the 20.9% rally of the S&P 500 Index which might result in higher AUM further.
Therefore, we are focusing on two investment managers — Federated Hermes, Inc. (FHI - Free Report) and Ameriprise Financial, Inc. (AMP - Free Report) .
Federated, with a market cap of $2.38 billion, is a publicly-owned investment manager providing services to its clients, and investing in public equity and fixed income markets globally. Ameriprise operates as a provider of various financial products and services to individual and institutional clients in the United States and globally, and has a market cap of $18.37 billion.
Federated currently carries a Zacks Rank #2 (Buy), with a Value Score of B, while Ameriprise has a Zacks Rank of 2, with a Value Score of A. Our research shows that stocks with a Value Score of A or B, when combined with a Zacks Rank #1 (Strong Buy) or 2, offer the best upside potential.
You can see the complete list of today’s Zacks #1 Rank stocks here.
Though both asset managers have similar business trends, deeper research into the financials will help decide which investment option is better.
Both asset managers have outperformed the industry (up 40.4%), in the past three months. While shares of Federated have gained 50.8%, Ameriprise’s stock has appreciated 63.4%. So, Ameriprise has performed better than Federated.
Both companies have been deploying capital in terms of dividend payments to enhance shareholder value. Federated has a current dividend yield of 4.46%, while Ameriprise has a dividend yield of 2.71%.
As compared with the industry’s average of 2.32%, shareholders of Federated gain more.
Ameriprise has a debt-to-equity ratio of 0.56 as compared with the industry average of 0.25. But, Federated, with ratio of 0.29, has an edge over Ameriprise.
Return on Equity (ROE)
The ROE is a measure of a company’s efficiency in utilizing shareholders’ funds. The ROE for the trailing 12-month period for Federated and Ameriprise is 28.57% and 38.86%, respectively. While both stocks scored above the industry’s level of 12.55%, Ameriprise reinvests its earnings more efficiently.
Earnings Estimate Revisions & Growth Projections
The Zacks Consensus Estimate for Federated’s 2020 and 2021 earnings moved 3.5% and 6.1% north, respectively, over the last seven days. The same for Ameriprise remained unrevised, during the same time frame.
However, Federated’s 2020 and 2021 earnings are projected to decline 11.5% and 4.9% year over year, respectively. For Ameriprise, the Zacks Consensus Estimate is pinned at $3.69 for 2020, reflecting a year-over-year increase of 3.6% and for 2021, the estimate suggests a 6.44% year-over-year jump.
Hence, Ameriprise reflects better earnings growth prospects.
Ameriprise’s sales are projected to be up 3.2% year over year to $12.2 billion in 2021. For Federated, the Zacks Consensus Estimate is pegged at $1.23 billion for 2021, calling for a year-over-year decline of 4.7%.
Therefore, Ameriprise has an edge here as well.
Our comparative analysis shows that Federated is better positioned than Ameriprise when considering the dividend yield and leverage ratio. Ameriprise wins on the price performance, earnings and sales growth expectations, and reinvesting potential.
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