BEN Financial Analysis

Analysis Date: 2/3/2025

Business Model

Franklin Resources generates revenue primarily through investment management fees, sales and distribution fees, and shareholder servicing fees. Investment management fees are the largest component, derived from managing assets across various asset classes and investment strategies. Sales and distribution fees are earned from the sale of fund products, and shareholder servicing fees are for administrative services provided to shareholders.

Revenue Sources

• Investment Management Fees: Fees earned for managing assets across equity, fixed income, alternative, multi-asset, and cash management strategies.
• Sales and Distribution Fees: Fees charged on the sale of fund products through various distribution channels.
• Shareholder Servicing Fees: Fees for providing administrative and customer support services to fund shareholders.

Income Statement Analysis

• Operating Revenues increased by 2% quarter-over-quarter, driven by increases in Investment management fees and Sales and distribution fees. (Pro)
• Operating Expenses decreased significantly by 14% quarter-over-quarter, primarily due to a large impairment of intangible assets in the previous quarter. (Pro)
• Compensation and benefits increased by 5% quarter-over-quarter, which could be a concern if revenue growth does not keep pace. (Con)
• Information systems and technology expenses decreased by 12% quarter-over-quarter, indicating potential cost management in this area. (Pro)
• Amortization of intangible assets increased significantly by 34% quarter-over-quarter, possibly related to recent acquisitions or changes in asset valuations. (Neutral - needs further investigation)
• Operating income turned positive in Q1 2025 compared to an operating loss in Q4 2024, largely due to the absence of the prior quarter's impairment charge. (Pro)
• Investment and other income, net decreased significantly by 89% quarter-over-quarter, which is a negative trend. (Con)
• Net income attributable to Franklin Resources, Inc. turned positive in Q1 2025 compared to a net loss in Q4 2024, mirroring the improvement in operating income. (Pro)

Balance Sheet Analysis

• Cash and cash equivalents and investments decreased by 8% quarter-over-quarter, possibly due to dividend payments, share repurchases, and funding of operations. (Neutral - needs further investigation into cash flow statement)
• Total assets decreased slightly by 3% quarter-over-quarter, broadly in line with the decrease in AUM. (Neutral)
• Total stockholders’ equity decreased by 2% quarter-over-quarter, indicating a slight reduction in the book value of the company. (Neutral)
• Shares of common stock outstanding increased by 1.5%, despite share repurchases, suggesting stock issuance might be outpacing buybacks or dilution from stock options/awards. (Slight Con - dilution)

Capital Allocation

Franklin Resources increased its quarterly dividend by 3.2% to $0.32 per share, demonstrating a commitment to returning capital to shareholders through dividends. The company also repurchased 0.3 million shares of its common stock for $5.8 million during the quarter, suggesting a moderate level of share repurchase activity. Management emphasizes strategic investments in the business to serve clients and enhance shareholder value, indicating reinvestment in growth areas. They have approximately $790 million of nominal cash tax benefits available related to acquisitions and an undrawn $800 million revolving credit facility, providing financial flexibility for future capital allocation decisions.

Management Commentary

Long-term inflows improved by 34% from the prior year quarter (excluding reinvested distributions).

Positive net flows in Equity, Multi-Asset, and Alternatives with a combined total of $17 billion during the quarter.

Institutional pipeline of won but unfunded mandates increased by $2.3 billion to $18.1 billion.

Fundraising in alternatives generated $6 billion this quarter, of which $4.3 billion was in private market assets.

This past year has presented significant challenges for Western Asset Management.

Long-term net outflows were $50 billion, including $67.9 billion of long-term net outflows at Western Asset Management.

Overall Sentiment: Neutral to Cautiously Optimistic. Management highlights positive trends in inflows excluding Western Asset Management and growth in key areas like alternatives and ETFs. However, the significant outflows from Western Asset Management and overall net outflows are concerning and temper the positive aspects. The focus on integrating Western and cost management suggests an effort to address these challenges.

Recommendation

Rating: Hold

Reason for Rating: Hold rating is recommended due to mixed performance indicators. While Franklin Resources shows strength in certain areas like inflows excluding Western Asset Management and growth in alternatives, the significant outflows from Western, coupled with decreased profitability in investment and other income, create uncertainty. The company is taking steps to address issues at Western and manage costs, but the impact of these measures is yet to be fully seen.

Disclaimer: This report is for informational purposes only and not investment advice. The analysis is based on limited information and subject to change. Investing in securities involves risks, including potential loss of principal. Past performance doesn't guarantee future results. Always conduct your own research, understand the risks, and consult a financial professional before making investment decisions.

Generated on: 2/3/2025, 7:27:01 AM