Rob Kim/Getty Images Entertainment 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.
Say what you want about ESG being a force for “good” or protecting the climate, what it really has become is a driving factor in the widespread malinvestment we have seen over the last decade, especially in the energy sector. As oil and natural gas prices spike, many ESG proponents take a naïve position: soaring energy prices prove that we need to transition to greener forms of energy. What they fail to mention is that ESG is a direct cause of the soaring energy prices. From higher interest rates on debt offerings to depressed equity valuations (especially from 2015-2020), ESG has created the structural undersupply in the energy market. The Business
While investors are free to disagree with me on my takes on the ESG approach of BlackRock, we can all agree that BlackRock is a high-quality business with impressive margins and a solid balance sheet. The company had a net income margin over 32% in 2021, which is impressive for a company the size of BlackRock. They have a history of growing revenues and the bottom line at double digit rates, which is certainly something that investors look for.
Another piece that is attractive to investors is the solid balance sheet. At the end of 2021, the company had $7.5B in debt and over $9.3B in cash on the balance sheet. While it is highly unlikely that they would choose to repay billions of debt that has a negative real interest rate, investors can be comfortable with BlackRock’s liquidity position. The biggest driver for the performance of BlackRock’s business is going to be continued growth in AUM. AUM Growth (10-K) (sec.gov) This is the biggest question mark for investors in my mind. If you think the markets continue to march higher, then it stands to reason the BlackRock’s AUM will continue to grow at an impressive rate through a combination of appreciation and net inflows. The problem is that I think we are in for a turbulent stretch in the markets, which could have a negative impact on BlackRock’s AUM and bottom line. The current valuation is reasonable, but I don’t think it is attractive enough to warrant buying for new investors. Valuation
BlackRock currently […]
source BlackRock: A Buy If You’re Bullish On Passive Investing And ESG
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