In a world of increased competition from the big banks, competition from ETFs, fee pressure, and increased regulatory risks, Gluskin Sheff + Associates Inc. (TSX:GS) stands out.
Gluskin Sheff is a $525 million market capitalization wealth management firm that is focused on high-net-worth clients and some institutional money, both of which are not subject to the previously mentioned risks.
The company’s revenue consists of management fees plus performance-based fees as certain rates of return are met. With $8.7 billion in assets under management, the company is well positioned to continue to take advantage of the secular trend of an aging population and greater wealth accumulation.
Between 2012 and 2016, the company’s revenue has increased 82.6%, which represents a cumulative average growth rate of 12.8%, and net income has almost doubled.
The business model is very profitable, as is evident when we look at the net margin of almost 30% that was achieved in 2016. It is also a business that has very high returns, with a 2016 return on investment and return on equity of over 30%. Yet the stock has a three-year return of 44%.
But it wouldn’t be fair to just look at the stock price because the total return (including dividends) looks much brighter.
Dividend
The company currently pays a dividend of $1 per share. Throughout the years, the company has paid a regular dividend plus a performance-based special dividend when appropriate. The dividend yield currently stands at 6%, and the payout ratio is 85%.
Co-founder arbitration
One issue that has been an overhang on the stock has been the arbitration that has been going on related to the co-founders’ post-retirement compensation and benefit agreements. Together, the co-founders are seeking payment of almost $200 million, which is material to the company. This has understandably put pressure on the stock price, but it also has affected fund flows in the sense that clients and/or potential clients see this as a potential risk and are waiting for a resolution and more certainty.
The company has put cash aside for this and currently has over $43 million in cash and cash equivalents on its
balance sheet.
Deploying cash
Management has clearly stated their intention to hold on to this cash up until the settlement of the arbitration process. After that point, possible uses of cash would continue to be special dividends and share buybacks.
I would note at this time that the company carries no debt on its balance sheet, and with the acquisition in 2014 of Blair Franklin having gone well, with the full integration being complete, it would not be a stretch to think that another such acquisition could be in the company’s future.
In summary, although it would be right to be concerned with regard to the markets these days, here we have a company that has been a consistent and high performer, and it should continue to benefit from the bigger secular trend that still exists.
