Published by Bob Ciura on March 16th, 2017
There are no bank stocks on the list of Dividend Aristocrats, but there are still plenty of financial stocks on the list.
The Dividend Aristocrats are a group of companies in the S&P 500 that have raised dividends for 25+ years.
Franklin Resources (BEN) and S&P Global (SPGI) are both Dividend Aristocrats. They are in the financial sector, but are not banks.
The two stocks are among just five Dividend Aristocrats that hail from the financial sector.
Franklin Resources has raised its dividend for 35 consecutive years.
S&P Global has paid a dividend since 1937, and has increased its dividend for 44 years in a row.
This article will discuss the differences in their business models and growth prospects, with the goal of determining which is the better dividend growth pick.
Winner: S&P Global
Franklin Resources manages the Franklin and Templeton families of mutual funds.
The company was named after founding father Benjamin Franklin, because he could be viewed as a symbol of the merits of frugality, saving, and investing.
The past two years have been difficult for Franklin Resources.
In 2015, revenue and earnings-per-share decreased by 6% and 13%, respectively.
Operating conditions only worsened in 2016: Franklin Resources’ revenue and earnings-per-share declined another 17% and 11%, respectively.
Management has attributed these declines to under-performance within several of the company’s flagship funds.
This has caused a prolonged deterioration in assets under management, which is one of the most important metrics for an investment management firm.
Source: Q1 Earnings Presentation, page 7
The longer-term decline is even more worrisome. Franklin Resources’ assets under management exceeded $880 billion at the end of 2014.
The reason why this is such a big concern for investors is that assets under management drive investment fees, which is a major source of revenue and profit.
Meanwhile, S&P Global is performing much better.
S&P Global, formerly known as McGraw Hill Financial, is the company behind the S&P 500 Index, which it created in 1957.
Today, the S&P 500 is arguably the most widely-referenced stock market index in the world.
S&P Global operates in three segments:
- Market and Commodities Intelligence (45% of revenue)
- Ratings (44% of revenue)
- S&P Dow Jones Indices (11% of revenue)
S&P Global has a strong grip on its core niche, which is providing credit ratings, financial analysis, and market intelligence services.
Source: Raymond James 38th Annual Institutional Investors Conference, page 7
Over the last several years, this has allowed S&P Global to achieve the rare combination of revenue growth, in addition to expanding margins.
This has fueled steady, double-digit earnings growth in the past five years. S&P Global’s adjusted earnings-per-share have grown at an 18% annual rate since 2012.
Source: Raymond James 38th Annual Institutional Investors Conference, page 8
Franklin Resources is also a strong brand in its own industry, but weak fund performance is a major concern.
Investment management is a highly competitive industry, and Franklin Resources does not enjoy a ‘sticky’ customer base.
Investors are quick to withdraw and transfer assets to a different investment manager, if performance deteriorates.
Franklin Resources’ net fund flows have remained stuck in negative territory for several quarters running.
Winner: S&P Global
For Franklin Resource, the good news is that it has seen a modest recovery in recent months.
Franklin Resources’ March report showed that total assets under management stood at $738.2 billion at the end of February, up 3.3% from the same month last year.
Still, assets under management remain about $142 billion below the level seen in December 2014. It will take a significant turnaround for Franklin Resources to recover fully.
This has had a significant impact, and will continue to challenge the company’s growth rates.
Source: 2016 Earnings Presentation, page 14
Franklin Resource’s 2016 earnings-per-share fell below 2012 levels.
By contrast, S&P Global is still growing at high rates.
The company is benefiting from the economic recovery and rising markets. This fuels increased investor interest in the markets, and demand for financial analysis services.
Going forward, S&P Global plans to continue its double-digit growth rates, through its core strategic initiatives.
One of these is to continue investing in its S&P Dow Jones Indices segment, which remains its smallest business. But, it is also growing at the highest rate, and this segment commands extremely high margins.
Source: Raymond James 38th Annual Institutional Investors Conference, page 17
Separately, S&P Global’s other major initiatives include launching a beta version of its new Market Intelligence platform, expanding its international business, and leveraging its acquisitions in its Global Platts businesses.
Winner: S&P Global
Franklin Resources currently pays an annual dividend of $0.80 per share. Based on its recent share price, the dividend yield is approximately 1.9%.
This is a slightly below-average dividend yield. The S&P 500 Index, on average, yields about 2%.
S&P Global has an even lower yield—its current dividend payout of $1.64 per share yields 1.3% right now.
As a result, while neither stock is particularly attractive for immediate dividend income, Franklin Resources has an advantage in terms of dividend yield.
That said, S&P Global is a much stronger dividend growth stock.
Its first-quarter 2017 dividend was a 14% increase from the prior quarterly payout.
Franklin Resources also recently hiked its dividend, by 11%. That is a healthy raise, but not quite as strong as S&P Global’s dividend increase.
S&P Global has a significantly longer streak of consecutive dividend increases than Franklin Resources.
And, considering Franklin Resources’ weak financial performance, S&P Global will likely continue to be the better dividend growth stock.
If Franklin Resources’ revenue and earnings continue to decline, its dividend growth is likely to slow as well.
Therefore, S&P Global gets the win for dividends.
Franklin Resources is a time-tested company, currently experiencing some significant challenges.
So far, it has continued to raise its dividend each year, and has maintained its Dividend Aristocrat status.
With more than three decades of dividend growth, it has demonstrated the ability to withstand difficult periods.
However, S&P Global is in a much better position. With double-digit earnings growth potential, it remains firmly on track.
Between these two, Franklin Resources provides investors with a slightly higher current dividend yield.
But this is more than offset by S&P Global’s stronger fundamentals and more compelling dividend growth potential moving forward.
As a result, S&P Global is the better financial Dividend Aristocrat of the two.