BlackRock: A Buy If You’re Bullish On Passive Investing And ESG -“But should energy companies act like energy companies?”

March 6, 2022 Stu Turley ESG, Finance, Industry Insights, Investments, Opinion
Blackrock Executives
Source: Seeking Alpha

Investment Thesis

BlackRock (BLK) is the largest asset manager in the world, with over $10 trillion in AUM. Shares have sold off by more than 20% since peaking near $970 in November 2021. Investors might find that the valuation and dividend growth is attractive, but I don’t think it’s a bargain at current prices. The company has grown revenues at a solid clip and has a solid balance sheet. Investors focused on income can secure a 2.6% yield with a history of solid dividend growth.

However, owning a company like BlackRock that makes a fortune on the passive investing movement is anathema to active investors like myself. I won’t own it, but I have to appreciate the solid business model, as well as the potential opportunities created by the passive money flows and the ESG investing movement. In my opinion, we are going to see a renaissance for active investment over the next decade. I don’t know if it will lead to declining AUM and in turn revenue for BlackRock, but I think there are better opportunities out there.

BlackRock and ESG

Instead of jumping right into the business, I’m going to lead off today with a brief criticism of BlackRock and the ESG movement. One of the reasons I’m not interested in owning BlackRock is management and their philosophy. I’m not a huge fan of Larry Fink, BlackRock’s founder and CEO. Apart from his role with BlackRock, he is known for being a proponent of ESG and stakeholder capitalism. He also sits on the board of the World Economic Forum, another organization I’m not a huge fan of. He isn’t the only one responsible for the woke narrative being accepted in corporate America, but he has been a driving force behind ESG and other things that have negatively impacted wide swaths of the country.

I might be different than other people my age on this topic, but I want my oil companies to behave like oil companies instead of pandering to Wall Street. The fact that a hedge fund owning 0.02% of shares could get three of Exxon’s (XOM) board seats because they secured the backing of BlackRock, State Street (STT), Vanguard and several pension funds proves how out of control the ESG movement is.

finviz dynamic chart for BLK

If you think BlackRock deserves an 18x or a 20x multiple, investors are likely going to see double digit returns from here, barring a significant downturn in the markets. BlackRock is a solid business at a fair price for investors that want to own a piece of the passive investing pie. Another thing that might attract investors to BlackRock is the capital return program.

Dividends & Buybacks

BlackRock has an impressive history of dividend growth, with a dividend increase every year since 2009 (they didn’t cut the dividend in the financial crisis either). Shares currently yield 2.6%. I think that as long as the market’s overall trend is up and to the right, BlackRock investors can expect continued dividend increases. They have also been buying back stock at a decent rate. The company repurchased 1.4M shares for $1.2B in 2021 and have 3.6M shares remaining on buyback authorization. I have mixed feelings about buybacks, especially with the valuation in 2021, but I think the buybacks are going to continue and might even accelerate if we see continued share price weakness.

Conclusion

If you think passive investing is going to continue to grow, owning shares of BlackRock is a great way to play it. Shares are starting to come into fair value after selling off by more than 20%, but I think T. Rowe Price (TROW) is more attractive today. I’m not a huge fan of passive investing, the ESG movement, or BlackRock, which have created distortions in the market that contrarian active investors can take advantage of. The company has a history of growing AUM, but weaker market conditions could lead to lower returns for BlackRock investors. I prefer T. Rowe Price but investors that prioritize dividend growth and think that the overall markets are going to march higher might choose BlackRock.

Source: Seeking Alpha – BeanKounter Capital

finviz dynamic chart for TROW