February 2, 2023

Tricia Oak

Business & Finance Excellency

3 Top Investment Industry Stocks to Buy in November

The last few years have been hard for investors, with the short pandemic-driven bear market in 2020 and now a lingering bear in 2022. The pain is even worse for investment managers like Franklin Resources (BEN 0.26%), T. Rowe Price (TROW -0.02%), and Cohen & Steers (CNS 0.37%). But the bad news that sent these stocks into a tailspin could be exactly what makes them soar over the long term. Let’s take a look at why these three investment industry stocks might just make great investment options in November.

A simple model

Investing can be complicated, so there’s a lot of work going on at Franklin Resources, T. Rowe Price, and Cohen & Steers. But, when you step back, the business models for these three companies are fairly easy to grasp. Each one takes money from individuals (and institutional investors) and invests it on their behalf. In return, these asset managers earn a fee. That fee is usually a percentage of the money they are managing. At the top-most level, the amount of money being managed is known as assets under management, or AUMs.

The problem is that bear markets reduce the value of the stocks and other securities that comprise the assets these companies manage. When AUMs go down, the income generated from managing the assets goes down right along with them. On top of that, bear markets often lead investors to pull money from the market, further reducing AUMs.

The numbers can be fairly frightening. T. Rowe Price’s AUMs were down by nearly 24% year over year in the third quarter. For Franklin Resources, its AUMs in fiscal 2022 (which ended in September) were down roughly 15% year over year. And for Cohen & Steers, AUMs dropped about 10% year over year in Q3. 

Needless to say, the most recent earnings results for each of these companies was pretty grim. But this swing is nothing new; it happens every time there is a bear market. And, assuming the companies muddle through in one piece, as they have before, the next bull market will likely lead to a dramatic recovery in AUMs and, thus, earnings. 

What bad looks like

Looking beyond the fear of a bear market, you’ll likely find today’s low prices a long-term buying opportunity. And part of the reason for that is the long and impressive histories of dividend increases this trio of asset managers created. Franklin Resources is the leader of the group with 40 consecutive years of annual dividend hikes. T. Rowe Price is close behind with 36 years. And Cohen & Steers sits at a respectable 13 years of hikes. 

Just how safe are the dividends? Franklin Resources fiscal fourth-quarter 2022 adjusted earnings payout ratio was 37%. T.Rowe Price’s Q3 adjusted earnings payout ratio was roughly 65%. And Cohen & Steers’ Q3 payout ratio was roughly 60%. Franklin Resources is clearly in the best position, but none of these asset managers appear to be at risk of a dividend cut.

Basically, they are each muddling through just fine. And when the bull market eventually comes around, their earnings will recover, and their payout ratios will drop to lower levels. Their stock prices are likely to rise along the way. Meanwhile, if you act quickly, you can still collect the generous dividend yields on offer here, with Cohen & Steers at 3.3%, T. Rowe Price at 3.6%, and Franklin Resources at 4.2%. 

Now is the time to act

As with so many other things in life, the asset management business swings along a pendulum. Today things are bad, but that will pass in time. Relatively small Cohen & Steers, which has historically focused on real estate and infrastructure, is a bit of an acquired taste but is worth a deep dive for more aggressive investors. However, large and diversified asset managers like Franklin Resources and T. Rowe Price are the types of asset managers that even conservative investors could learn to love, especially if they are bought when the stocks are unloved.