BlackRock (NYSE:BLK) has a long growth runway thanks to its large-exposure to passive investments. Moreover, it’s trading at a good value today and offers a secure yield of 3%.
BlackRock is a Long-Running Winner
BLK has been a long-term winner, delivering 15-year total returns of 15.8% per year versus the S&P 500’s 7.4% return in the period. Its 10-year returns of 13.5% per year also won against S&P 500’s 12.9%.
BLK’s earnings can appear a bit bumpy but in reality is slow growth periods occurring after high-growth ones. For example, it had three years of double-digit rate growth followed by a slowdown in 2015 and 2016. Then, high growth resumed in 2017. What’s important is that its long-term growth is intact. For example, from 2007, before the last financial crisis hit, to 2018, the company’s earnings per share increased by 11.5% per year on average.
BlackRock’s consistent earnings growth has allowed the stock to begin paying a dividend in 2003. This year marks its 16th consecutive year of dividend growth. BLK’s five- and 10-year dividend growth rates are 11.3% and 15.5%, respectively.
With a payout ratio of ~48%, there’s a big buffer to protect BLK’s dividend, which is currently good for a yield of 3%. Investors can also expect dividend increases in the future to more or less match its earnings growth rate.
- Many forces act to drive stock price movements over the short and long term.
- Ultimately, in the long run, the total returns from your stock portfolio are driven by the performance of the underlying businesses and the valuations you bought the stocks at.
- So, focus on business fundamentals and make sure your chosen stocks have stable and growing profits and reasonable debt levels.
Five things that can drive powerful stock movements are news, sentiment, profits, valuation, and debt levels.
In the short run, the stock price can be driven by news.
M&A activities are a common example. Depending on how positive (or not) the market feels about the stocks related to the M&A activity, the stocks may fall or rise meaningfully on the day of the news announcement.
As a side note, many acquisitions, especially large ones, require integrations of complicated businesses and cultures, and more often than not lead to underperforming stock prices, at least over the next year or two after the purchase…
Other common examples are earnings release or guidance revision. Depending on the results of a company’s earnings release that may include changes in the management’s outlook for the company, the underlying stock could go up or down.
Since 2018, Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B) stock has been in consolidation mode, which should pique the interest of long-term investors.
Long-term market-beating performance
Warren Buffett has been a great long-term investor and has generated excellent total returns over many years. From 1965 to 2018, BRK’s book value per share (“BVPS”) compounded at 18.7% per year, while the stock compounded at 20.5% per year, which more than doubled the S&P 500 total returns of 9.7% per year.
The Berkshire Advantage
The Top-Notch Insurance Operations
Berkshire’s well-run underlying insurance business generates float as a source of low-cost capital. In The Outsiders written by William N. Thorndike, Jr. that discusses “eight unconventional CEOs and their radically rational blueprint for success”, the author explained that
Over time, Buffett evolved an idiosyncratic strategy for his insurance operations that emphasized profitable underwriting and float generation over growth in premium revenue. This approach, wildly different from most other insurance companies, relied on a willingness to avoid underwriting insurance when pricing was low, even if short-term profitability might suffer, and, conversely, a propensity to write extraordinarily large amounts of business when prices were attractive. (Page 179)