3 Ways to Value Brookfield Asset Management (TSX:BAM)

Discounting dividends, analyzing fundamentals, or comparing peers may be the best ways to value Brookfield Asset Management Inc (TSX:BAM.A)(NYSE:BAM).

| More on:
edit Business accounting concept, Business man using calculator with computer laptop, budget and loan paper in office.

Image source: Getty Images

After delivering a 5,000% return to shareholders over 20 years, Brookfield Asset Management Inc (TSX:BAM.A)(NYSE:BAM) has gained a cult following in the market. Many of my Fool colleagues now consider this the quintessential “forever” stock that deserves a spot on every long-term investor’s portfolio.

I don’t disagree. Brookfield’s track record and balance sheet speak for themselves. However, even the best investment opportunity can be ruined by entering at the wrong price. Paying too much for an overvalued stock is never a good idea regardless of the long-term prospects or fundamentals.

With that in mind, here are three ways that Canadian investors can measure the value of Brookfield’s stock and attempt an entry at optimal prices:

Dividend discount

Perhaps the best way to measure the intrinsic value of any dividend stock is to use the dividend as a proxy for free cash flow and discount it back to present value.

The traditional dividend discount models equate a stock’s intrinsic value with the sum of all its future dividends adjusted for growth and required return expectations. 

Given the fact that Brookfield has been paying a dividend for several years makes the dividend discount model an appropriate valuation tool.

Brookfield’s dividend yield isn’t higher than average, but its payout history is more consistent than that of most Canadian stocks. Dividends have been ongoing since at least 2012 and the quarterly payout amount (in Canadian dollars) has compounded at a rate of 5.4% since then. Currently, the stock yields just 1.3% with an annual payout of $0.87 per share.

Assuming that future growth is just 5% compounded every year and the required rate of return is 6%, the stock’s intrinsic value is $91.35, which implies that the stock is undervalued by nearly 31.5%.

Ratio comparison

Comparing ratios is another simple way to measure a stock’s relative value. In my view, Brookfield’s closest peer is The Blackstone Group. Although the market capitalization of the two companies is nearly identical, Blackstone is arguably the leader in this industry.

Blackstone’s trailing price-to-earnings (PE) and price-to-book (PB) ratios are higher than Brookfield’s. While Brookfield trades at a PE ratio of 14 and PB ratio of 1.68, Blackstone trades at 16 and 4, respectively. However, Brookfield has higher debt ($1.2 for every dollar in equity) and lower return on equity (7.66%) than its rival.

Fundamental valuation

Brookfield’s preferred performance metric seems to be funds from operations, which was reportedly US$4.3 billion for the trailing 12-month period. This amount is nearly flat year over year.

Meanwhile, the company’s stock price is 10 times higher than the trailing FFO amount.

Considering the lack of growth in FFO over the past year and the 7.66% return on equity, Brookfield seems overvalued when the price-to-FFO is adjusted for growth.

Bottom line

Brookfield’s stock seems undervalued based on a dividend discount model — fairly valued when compared to Blackstone and overvalued when considering growth rates.

None of the three valuation methods mentioned here are perfect. All of them rely on imperfect data and individual assumptions. Even the interpretation of similar results relies on the investor’s notion of fair value.

Nevertheless, I believe every savvy long-term investor needs to pick at least one of these three tools to appropriately value and optimize their investments in this cult stock.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Vishesh Raisinghani has no position in any stocks mentioned. The Motley Fool owns shares of Brookfield Asset Management and BROOKFIELD ASSET MANAGEMENT INC. CL.A LV.

More on Dividend Stocks

View of high rise corporate buildings in the financial district of Toronto, Canada
Dividend Stocks

Top 2 REITs to Buy Before Yields Fall Along With Interest Rates

Canadian Apartment Properties REIT (TSX:CAR.UN) is just one REIT that could gain when rates really start to tumble.

Read more »

Printing canadian dollar bills on a print machine
Dividend Stocks

Where to Invest $10,000 in June

Canadian small caps are widely outperforming the TSX, and REITs, including Dream Industrial REIT (TSX:DIR.UN) could recover as interest rates…

Read more »

edit Real Estate Investment Trust REIT on double exsposure business background.
Dividend Stocks

Finally, This REIT ETF Could Be the Best Buy of 2024

This ETF is finally looking up, with enormous returns already in 2024. And a high dividend yield that should only…

Read more »

dividends grow over time
Dividend Stocks

3 Canadian Stocks Poised to Double by 2025

Three TSX stocks could benefit from an improved market environment, and break out and double by 2025.

Read more »

A close up color image of a small green plant sprouting out of a pile of Canadian dollar coins "loonies."
Dividend Stocks

Why Park Lawn Stock Nearly Doubled Last Week

Park Lawn (TSX:PLC) stock saw shares surge by 67% after the announcement that it would be going private as early…

Read more »

A Canada Pension Plan Statement of Contributions with a 100 dollar banknote and dollar coins.
Dividend Stocks

Claim CPP at 60? Here’s Why it Could Pay Off Big

Claiming the CPP at 60 has financial consequences but could be advantageous and more beneficial to some prospective retirees.

Read more »

Businessman holding tablet and showing a growing virtual hologram of statistics, graph and chart with arrow up on dark background. Stock market. Business growth, planning and strategy concept
Dividend Stocks

Rate Cut Tailwinds: A Dividend Dynamo Ready to Fly

SmartCentres REIT (TSX:SRU.UN) is a great high-yield play to own if you think rates will fall off from here.

Read more »

Increasing yield
Dividend Stocks

2 High-Yield Dividend Stocks That Are 10/10 Buys in June

These two dividend stocks are making a roaring comeback, and it's one that will only grow stronger now that interest…

Read more »