As a dividend growth investor, I am constantly on the lookout for additional income generating opportunities. Sometimes I buy shares that I own to take advantage of their attractive valuation. On other occasions, I try to diversify further to limit the risk of based on a limited number of shares.
In this article, I will look at the financial sector. I lack exposure mainly to financial companies and consumer staples companies. One of my favorite segments in the industry, especially when markets are down, are asset management companies. I own stock in T. Rowe (TROW) and Ameriprise Financial (AMP). I also analyzed BlackRock (BLK) lately. In this article, I will study SEI Investments (NASDAQ: SEIC)
I will analyze the company using my dividend growth stock analysis methodology. I use the same method to make it easier to compare searched companies. I will examine the fundamentals, valuation, growth opportunities and risks of the business. I will then try to determine if it is a good investment.
Seeking Alpha’s business overview shows that:
SEI Investments Company is an asset management holding company. The company provides its clients with wealth management, retirement and investment solutions, asset management, asset administration, investment processing outsourcing solutions, financial services and investment advisory services. investment. Through its subsidiaries, the Company manages separate client-focused portfolios. She also initiates and manages equity, fixed income and balanced mutual funds.
SEI Investments sales have more than doubled over the past twelve months. The business saw its fastest growth during the pandemic as more people showed interest in investing and closed stores led to increased disposable income. The company is growing primarily organically as assets under management grow, while its M&A activity aims to enhance its technology capabilities. Going forward, analyst consensus, as seen on Seeking Alpha, expects SEI Investments to continue to grow sales at an annual rate of around 3% over the medium term.
EPS (earnings per share) grew much faster. EPS has nearly quadrupled over the past ten years. EPS grew at a much faster rate compared to sales. EPS grew faster as the company, in addition to increasing sales, executed large buyouts and became leaner and more efficient, thus benefiting from higher margins. Going forward, analyst consensus, as seen on Seeking Alpha, expects SEI Investments to maintain stable EPS over the medium term pending a market recovery.
The dividend is one of the strengths of the company. The dividend has been increasing for over 30 years, which means the company is a dividend aristocrat. The current dividend is secure and unlikely to be reduced as the current payout ratio is below 20%. The dividend yield is not too attractive at 1.5%. Still, the company has plenty of room for growth, and investors should expect another boost in the next announcement, as it raises the dividend twice a year.
In addition to the dividend, the company also returns capital to shareholders through share buybacks. Buyouts are an effective method of returning capital to shareholders. They are beneficial as businesses expand, supplement EPS growth and support long-term returns. Over the past decade, SEI Investments has repurchased 22% of its outstanding shares, supporting strong EPS growth.
The company’s P/E (price to earnings) ratio stands at 13 when considering 2021 actual earnings and 14.6 when considering 2022 forecast earnings. EPS in 2022 will be slightly lower as the company faces a bear market that is shrinking its assets under management. Still, paying 14.6 times earnings for a dividend aristocrat with a long history of growth seems fair.
The chart below from FAST Graphs also implies that the company is reasonably valued and possibly even attractively valued. The average valuation of SEI Investments over the past two decades was 21.8, and the current valuation is significantly lower. The average growth rate during this period was 9%, which is higher than current expectations, but this is a challenge due to negative market returns. As returns return to normal, there will be room for more expansions.
In conclusion, SEI Investments is a solid company. Solid sales growth leads to robust EPS growth, which pays generous dividends and buybacks while maintaining growth. These great fundamentals are coming in at what I think is a fair and even slightly undervalued price. Paying less than 15 times earnings for a dividend aristocrat like SEI Investments makes sense.
The first opportunity for SEI Investments is its diversification. In addition to its more traditional asset management services, the company offers technology platforms to its clients to better manage their operations. It enables institutional clients to streamline investments, execute strategy and work with millions of clients. These revenues are less sensitive to market fluctuations because they come from subscriptions. It also makes SEI Investments more “sticky” because it offers a one-stop-shop.
Another growth opportunity is mergers and acquisitions activity. The company focuses its M&A activity on technology capabilities to enhance its technology offering. Only one major acquisition was aimed at increasing assets under management, Huntington Steele, in 2018. The rest were aimed at better technology and international expansion. The company has almost no debt, and with many tech companies and startups looking for capital, it can take advantage of the situation and acquire it.
International expansion is another growth opportunity for SEI Investments. The company has offices in less than ten countries. Only 15% of its sales come from markets outside the United States. Therefore, there is plenty of room for expansion as the company rolls out more services across the world. It seeks new markets and more products within existing products.
The company has $1.3 billion in assets under management. The company is sensitive to market fluctuations and the decline in the market has a direct impact on its profits. During a recession, there may be a long period of low stock returns, and the stock market decline may continue with lower earnings. This is the most significant risk for SEI Investments in the short to medium term.
Moreover, the company also operates in a highly competitive business environment. Many asset managers benefit from a larger scale than SEI Investments. They can leverage their scale to offer more products at better prices. SEI Investments has its technology business that supports its rigidity and provides added value, but competition remains a long-term challenge.
Mutual funds are a source of income for SEI Investments. Mutual funds are less favorable these days as investors prefer low cost index funds and ETFs. The company charges high fees for mutual funds because it offers active management. The challenge here is to maintain high performance for a long time to justify the higher prices. This forces the company to continue to excel in maintaining its current assets under management, let alone increasing them.
SEI Investments is an excellent company for investors focused on dividend growth with a long-term investment horizon. The company has strong fundamentals with rising sales driving higher EPS which is fueling dividend growth and redemptions. This package comes at what I think is a fair and even slightly attractive assessment.
The company has limited risks that are not unique to it, but the whole industry faces them. Its technological offer allows it to differentiate itself from the competition. Therefore, I believe SEI Investments is a BUY at current prices for investors looking for an asset manager with lower volatility. I recommend adding to the position gradually.