Invesco: Good buy but Chinese expansion could go wrong (NYSE:IVZ)

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Investment thesis

Invesco Ltd (NYSE:IVZ) reported strong fourth quarter results and ended 2021 strong. There is no doubt, based on valuation metrics, that the company is currently undervalued. It is also true that you can find better asset management companies to invest in, but IVZ is a decent company at a reasonable price.

However, there is a catch: the company’s extreme expansion into the Chinese market. I think in the short term this can be a significant advantage over its competitors. However, in the long term, unpredictable Chinese financial and investment regulations could not only ruin this advantage, but also hurt the company’s bottom line.

business model

Invesco is a publicly traded investment management company. The firm provides its investment services to retail clients, institutional clients, high net worth clients, etc. IVZ employs over 8,000 people at 51 locations worldwide. Thirteen of these sites are in the Asia-Pacific region, underscoring the importance of the company and its long-term vision for this region.

IVZ tracks revenue from four different streams, but investment management fees are responsible for the lion’s share of its revenue. Investment management services are satisfied over time as the services are provided and are generally based on a percentage of the value of the client’s assets under management. The other major revenue stream is performance and distribution fees. These are fees on external mutual fund sales, asset-based sales or marketing, and ETF sales such as QQQ.

IVZ Results for the fourth quarter of 2021

Fourth quarter 2021 results

Finances and results of IVZ

Fourth quarter results

IVZ published good results in the fourth quarter. The company’s long-term net flows increased 27.6% year-on-year, but were down 6% from third quarter figures. Their period-end AUM could increase both year-over-year and prior quarter results. IVZ ended the fourth quarter with $1610.9 billion in assets under management. Their operating margin also remained high (42%). The company also outperformed estimated fourth-quarter EPS of $0.76 per share by 13% and reported EPS of $0.86 per share. IVZ has outperformed its previously estimated EPS figures 65% of the time and underperformed the figures 34.5% of the time over the past 7 years.

The company will announce its first quarter results on April 26, 2022, before the market opens. We can already see that the company will most likely post worse results than last quarter, as its assets under management declined in January and February. Assets under management fell 3.7% in January and a further 1.3% in February. The March figures will arrive in a few days.

Evaluation

Based on several factors, IVZ is undervalued. Seeking Alpha’s overall valuation rating is B. IVZ has a forward non-GAAP P/E ratio of 7.52, above the industry average and approximately 16.7% above its 5-year average. Many other metrics show IVZ’s undervaluation, such as EV/EBITDA (30% above the industry median), price per sale (almost 40% above the industry median), etc.

We can see the same trend by analyzing its dividend yield. You could have bought IVZ with a better dividend yield than 3.1% only 12% of the time over the past 12 months. The company has a decent return on equity, ROA and ROI figures. However, although they are lower than most of their peers such as Franklin Resources (BEN), this does not make IVZ a bad company.

Graphic
Data by YCharts

Company specific risks

In the long term, I can see two major risk factors for IVZ. One of them is a company-specific risk and the other is more related to the asset management segment.

Redemptions and shifts between client portfolios are ongoing risk factors. This could be due to investors reducing their investments in general or in the market segments they focus on. Investors can withdraw profits from their investments when positive returns occur or due to poor investment performance. The fees they charge vary by type of asset managed, with higher fees on actively managed equity and balanced accounts, as well as real estate and other alternative asset products, and fees lower on fixed income accounts, stable return accounts and some passively managed products.

And here is the 20-year trend of the rise of passive investment vehicles. Domestic passive investing is expected to overtake actively managed funds by 2026 (non-domestic a bit later). So, over the next five years, IVZ’s earnings will change, and if not carefully monitored, may decline due to the shift to low-fee accounts.

The company has experienced strong growth in the Asia-Pacific region, particularly in China. IVZ could almost double its AUM in 2 years in this region and is now responsible for 15% of its total portfolio. In China, new regulations for investors can come into effect quickly compared to the United States or the EU. Reviewing policies and regulations should be seen as ongoing risks when it comes to investing in China, to be watched carefully and factored into company research and portfolio management.

If this trend continues by 2025, realistically a quarter of IVZ’s assets under management and revenues will come from this region, particularly China. Therefore, any geopolitical risk or regulatory change may adversely affect IVZ’s earnings and it may strike through cloudless lightning in the sky before predicting the storm like with Chinese tech stocks. Now, geopolitical factors must be assessed accordingly despite nearly all Chinese tech stocks being undervalued based on traditional valuation metrics.

Change of IVZ portfolio

Fourth quarter results 2019, 2020, 2021

My take on the IVZ dividend

Current dividend

IVZ has a forward dividend yield of 3.14%. The company has been paying a consecutive dividend for 13 years and has a one-year dividend increase streak. This is due to the pandemic as management had to cut the dividend to alleviate some pressure on the company’s cash flow. I think this restructuring went well, and now IVZ has a lot of positive cash flow to pay dividends in the future. Prior to the COVID-19 outbreak, management had a nice 10-year consecutive dividend raising period, and I think that trend can continue. This theory is supported by a dividend increase of almost 10% last year.

Future sustainability

There is no doubt that the current payout rate of 25% is safe and sustainable in the long term. IVZ usually announces its dividend increase alongside its first quarter results, so I expect management to announce the new dividend at the end of April. According to analysts’ average estimates, they expect a dividend increase of 4.4% this year, which means the new dividend may be $0.1775 per share quarterly instead of $0.17 per share. currently.

Dividend distribution rate IVZ

The table is created by the author. All figures are taken from the company’s financial statements and SA earnings estimates.

Final Thoughts

Although in January and February, assets under management were down around 5% combined, IVZ has performed well in 2021. It still has strong growth potential in the Asia-Pacific region. The numbers are strong, the company is undervalued and the dividend yield is attractive. Also, I expect a dividend increase in April. Only one question remains: what do you think of the Chinese expansion? In my opinion, in the next 2-3 years it won’t make any difference, but in the longer term it may prove ugly for IVZ. Let me know your thoughts in the comments section.

About Catherine Wilson

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