As a pure-play global alternative asset manager, Brookfield Asset Management (TSX:BAM) was spun off from Brookfield Corp. in December 2022. Since then, the stock has traded 4% lower, with volatility in between.
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Growth
Brookfield Asset Management is an asset-light business that has strong growth targets and offers a decent dividend yield. It generates stable fee-related earnings, which have increased at a double-digit rate. Today, it has about US$850 billion of assets under management. And about half of it is fee-bearing capital.
In 2018, management projected to double its fee-bearing capital by 2023. Instead, it has more than tripled it to US$440 billion (i.e., a compound annual growth rate of approximately 27%) thanks to new business lines and strategies, including the addition of insurance solutions and the transition fund, and the Oaktree acquisition, which allowed it to establish scaled credit capabilities.
Over the next five years, BAM plans to organically grow its assets under management to north of US$2 trillion and fee-bearing capital to over US$1 trillion. Any acquisitions could spur higher growth.
Diversified assets, diversified income streams
Brookfield Asset Management manages investments across renewable power and transition, infrastructure, private equity, real estate, and credit, netting a long-term rate of return averaging approximately 16% across the flagship funds. For each of these areas, it serves between roughly 100 to 1,050 institutional investors. Consequently, it generates diversified income streams from a diversified set of assets.
It’s on the lookout to expand into new asset classes, including technology, healthcare, specialty finance, and consumer brands. The company also earns performance fees for funds it’s able to earn target returns for its clients. The fees are accumulated as carried interest and are unlocked when the money is returned to investors. Given the track record of Brookfield Asset Management’s execution, it estimates it could realize approximately US$19 billion in gross carried interest between 2029 and 2033.
BAM has competitive advantages being a part of the Brookfield ecosystem, which allows the Brookfield businesses in core sectors of the economy to share knowledge and insights, helping it identify themes and trends, spot pockets of value, and source attractive investment opportunities, as highlighted in Brookfield Asset Management’s recent presentation.
BAM stock is a solid long-term investment
Although Brookfield Asset Management’s dividend yield of about 4.1% today is not as attractive as the income provided by risk-free one-year Guaranteed Investment Certificates (GICs) that yield about 5.75%, the company anticipates fabulous dividend growth at a compound annual growth rate of 15-20% over the next five years that align with its growth targets.
At $42.39 per share at writing, the dividend stock trades at a discount of almost 19% according to the 12-month analyst consensus price target. Let’s be more conservative and assume the stock experiences no valuation expansion over the next five years. If it’s able to grow at a rate of 15%, it means investors can approximate long-term returns of about 19% per year, which would be a superb return.
Lower-risk, fixed-income investments like GICs are competing with higher-risk stocks like Brookfield Asset Management for investors’ capital. So, the stock is likely to experience more volatility, especially if interest rates continue to rise. Interested investors should aim to buy quality stocks like BAM on dips to target a lower cost base.
