Waddell & Reed Financial, Inc. (WRF) is a holding company that is one of the oldest mutual fund complexes in the US established in 1940. It earns its fees via Investment Management, Underwriting/Distribution, and Shareholder services.
It has assets under management (AUM) of $60bn as at April 30th 2020 and assets under administration of $52bn, which include advisory and non-advisory accounts held in brokerage or fee-based asset allocation programs.
Its revenues are from the Institutional, Unaffiliated, and Wealth Management segments – with investments in equity, fixed income, and money market funds – employing a wide variety of strategies.
As an active manager, it has seen relentless redemptions – with AUM falling from $80.5bn three years ago. Performance has been poor with only 37% of its funds and assets in the top half of mutual fund performance over a five-year period.
Revenues have declined from $1.52bn five years ago to $1.08bn in the last twelve months. Net income fell from $246m in 2015 to $105m in the last twelve months. Net cash generated from operations (after share-based compensation) was $126m in the last twelve months and better adjusts for non-cash charges and non-operating income to reflect current operating earning power.
Capital expenditures are minor, amounting to around $6m for technology infrastructure, leaving behind $120m of current net cash generating power.
It maintains significant cash and investments of $647m offset by short-term notes payable of $95m due in January 2021.
The equity sells for $922m or 7.7x net cash flow – a 13% post-tax yield. This provides a sufficient margin for the equity holders over its incremental borrowing rate of 4.28%.
What stands out is WRF’s aggressive dividend and repurchase program. In the most recent year, it spent over $230m in dividends and repurchases aggregating to a yield of 24% on the current price. Dividends and repurchases aggregated similar amounts in the last five years totalling $1.06bn.
Net cash balances of $552bn bolstered by net cash flows could sustain such a yield for several years. Meanwhile, the net cash flow yield provides enough of a margin of safety for investors to withstand further deterioration in WRF’s business.