For a long time running, the Franklin Resources' (BEN) joke was that the underlying equity position of the company actually outperformed the management's mutual fund selections. That is, an investor might have been better served to just own the company rather than one of its funds. For instance, in the period from 1995 to 2005 Franklin Resources had an annualized compound shareholder return over 21% a year including dividends - double the percentage return of the S&P 500 index and consequentially over two and a half times the amount of value that would have been gained. Perhaps this might indicate that Franklin Resources' sales force is just as good as their money management team.
Today, it seems that a similar story is being told. Importantly, everyone is different with regard to their needs and objectives - so we cannot specifically comment on whether or not their funds might be congruent with a specified strategy. However, we would be inclined to believe that their groups of funds aren't especially differentiated from the masses of available aggregation vehicles.
Franklin Resources likes to indicate that you can "gain from their perspective." For instance, they indicate that one advantage that they have is an abundance of resources across the globe. Specifically:
"We believe superior insight into the cultural nuances of an investment helps us spot opportunities others may miss. To deliver this competitive advantage to our shareholders, we "think globally and act locally."
The website goes on to indicate that Franklin Resources has more than 590 investment professionals in 35 countries, with an average tenure of over 16 years in the industry and over 10 years with the firm. And conceivably this is a significant point - a large group of experienced professionals around the world appears to be a solid advantage. However, we don't believe that this specifically provides an overwhelming economic moat. For one thing, any large investment company is likely to have resources strewn about the world. Add in technology making the globe a much smaller place and it seems like this "advantage" is diminishing, if existent in the first place.
The real advantage of Franklin Resources - in our opinion - is their underlying ideology and presentation of topics. You can get advice and investment aggregation vehicles almost anywhere, so it must follow that Franklin Resources brings something else to the table. This is precisely what we have observed. Their perspective might be the company's backbone, but properly advertising this perspective is what brings clients in the door.
A quick review of the company's "2020 vision" website will reveal an array of cool tools and investing presentations. For instance, Franklin Resources makes the "Case for Equities" using 5 proposals:
- History Favors a Return to the Mean
- The World is Getting Smaller
- Innovation Will Surprise Us... Again
- Quality Companies Are Not Short-Sighted
- Equities Help Protect Purchasing Power
Those are great points that provide solid information, not to mention some handy graphics. For example, did you know that the S&P 500 has had a positive year 71% of the time and only 4 times out of the last 75 has it been down over a 10-year period? Or did you know that dividend growers and initiators have steadily outperformed non-dividend paying companies and even high-yielding companies over the last few decades? In fact, reinvesting dividends can even turn a negative ten-year return positive. It could also be useful to know that from 1977 to the end of 2012, a single U.S. dollar would have the purchasing power of about 27 cents today as compared to gold, bonds and stocks equal to $2.64, $6.03 and $11.37 respectively.
In addition, the company also provides behavioral finance lessons on availability bias following the crowd, the risk of playing it "safe," perception vs. reality and how investors historically buy high and sell low. Franklin Resources truly does provide an informative service to its clients and otherwise interested parties.
In addition, as previously mentioned, the company has shown a great propensity to reward shareholders. For instance, Franklin Resources has done a good job of reducing common shares outstanding from about 760 million in 2006 to today's mark closer to 635 million. Furthermore, the company has not only paid but also increased its dividend for the last 32 years; with a selection of special dividends mixed in as well.
Finally, one's lasting argument against the company would likely be: they do something that many individual investors could do on their own. Certainly there are an abundance of do-it-your-self investors on websites just like this one. However, we would view this quite similar to investing in a casino. On a personal level, one would likely recognize that the house has a mathematical advantage in every instance and thus it would not be prudent to gamble without expecting to lose. Luckily with money management the stakes aren't quite so high, but it should not be forgotten that their profits come from clients' funds. Granted, such professional service does provide the benefits of increased time, knowledge and curbing investor psychology - but the point stands. On the other hand, much like owning the more favorable house side of a casino, partnering with such a company might be an even more reasonable deal. Let's get a clearer view with the company's past operating results.
15 Years of Growth
Franklin Resources Inc also known as Franklin Templeton Investments has grown earnings (orange line) at a compound rate of 11.6% since 1999, resulting in a $34.2 billion dollar market cap. In addition, Franklin Resources' earnings have risen from $0.62 per share in 1999, to today's forecasted earnings per share of approximately $3.44 for 2013. Further, Franklin Resources has steadily increased its dividend (pink line) and has been able to mix in special dividend payouts as well.
For a look at how the market has historically valued Franklin, see the relationship between the price (black line) and earnings of the company as seen on the Earnings and Price Correlated F.A.S.T. Graph below.
Here we see that Franklin Resources' market price previously began to deviate from its justified earnings growth; starting to become overvalued in 2007 and coming back to fair value during the most recent recession. Today, Franklin Resources appears fairly valued in relation to both its historical earnings and relative valuation.
In tandem with the strong earnings growth, Franklin Resources' shareholders have enjoyed a compound annual return of 12.4% which correlates closely with the 11.6% growth rate in earnings per share. A hypothetical $10,000 investment in Franklin Resources on 12/31/1998 would have grown to a total value of $56,292.33, without reinvesting dividends. Said differently, Franklin Resources' shareholders have enjoyed total returns that were roughly 3.3 times the value that would have been achieved by investing in the S&P 500 over the same time period. It's also interesting to note that an investor would have received approximately 2.2 times the amount of dividend income as the index as well.
But of course - as the saying goes - past performance does not guarantee future results. Thus, while a strong operating history provides a fundamental platform for evaluating a company, it does not by itself indicate a buy or sell decision. Instead, an investor must have an understanding of the past while simultaneously thinking the investment through to its logical, if not understated, conclusion.
In the opening paragraphs a potential catalyst was described. It follows that the probability of this outcome should be the guide for one's investment focus. Yet it is still useful to determine whether or not your predictions seem reasonable.
Seventeen leading analysts reporting to Standard & Poor's Capital IQ come to a consensus 5-year annual estimated return growth rate for Franklin Resources of 12%. In addition, Franklin Resources is currently trading at a P/E of 15.6, which is inside the "value corridor" (defined by the orange lines) of a maximum P/E of 18. If the earnings materialize as forecast, Franklin Resources' valuation would be $90.44 at the end of 2018, which would be a 13.1% annualized rate of return including dividends. A graphical representation of this calculation can be seen in the Estimated Earnings and Return Calculator below.
Now, it's paramount to remember that this is simply a calculator. Specifically, the estimated total return is a default based on the consensus of the analysts following the stock. The consensus includes the long-term growth rate along with specific earnings estimates for the next two upcoming years. Further, the dividend payout ratio is presumed to stay the same and grow with earnings. Taken collectively, this graph provides a very strong baseline for how analysts are presently viewing this company. However, a F.A.S.T. Graphs' subscriber is also able to change these estimates to fit their own thesis or scenario analysis.
Since all investments potentially compete with all other investments, it is useful to compare investing in any prospective company to that of a comparable investment in low risk treasury bonds. Comparing an investment in Franklin Resources to an equal investment in a 10-year treasury bond, illustrates that Franklin Resources' expected earnings would be 4.1 times that of the 10-year T-Bond Interest. This comparison can be seen in the 10-year Earnings Yield Estimate table below.
Finally, it's important to underscore the idea that all companies derive their underlying value from the cash flows (earnings) that they are capable of generating for their owners. Therefore, it should be the expectation of a prudent investor that - in the long-run - the likely future earnings of a company justify the price you pay. Fundamentally, this means appropriately addressing these two questions: "in what should I invest?" and "at what time?" In viewing the past history and future prospects of Franklin Resources we have learned that it appears to be a strong company with reasonable upcoming opportunities. However, as always, we recommend that the reader conduct his or her own thorough due diligence.
Disclosure: No position at the time of writing.
