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Should You Buy This Juggernaut Asset Manager?

Earlier this month, BlackRock (NYSE: BLK), the world's biggest asset manager, reported third-quarter revenue and earnings that handily beat analysts' estimates. Beyond all that good news, the company boasts a market-beating 1.8% dividend yield compared to the S&P 500's 1.3%. But is it a dividend stock that investors should add into their portfolio?

To answer that question, let's take a closer look at BlackRock's operating results, balance sheet, and valuation.

Image source: Getty Images.

BlackRock keeps on winning for shareholders

With the S&P 500 closing at another record high last week amid corporate earnings reports that exceeded forecasts, it should come as little surprise that BlackRock posted robust operating results in the third quarter.

BlackRock's assets under management (AUM) surged 21.2% from a year earlier to $9.46 trillion from $7.81 trillion. And what's encouraging is that while $1.15 trillion of this increase was due to equity market appreciation, another $455 billion was because investors put their money into the company's funds. This signals that its reputation as the top asset manager in the world remains intact.

BlackRock's increase in AUM over the past year helped drive a 15.6% increase in revenue in the third quarter to $5.05 billion. The results beat average analyst revenue estimates of $4.82 billion.

Increased AUM also helped widen the company's profit margin, or net margin, by almost 100 basis points to 33.5%, contributing to the 18.8% increase in non-GAAP (adjusted) earnings per share (EPS) of $10.95 in the third quarter. This was 11.6% higher than analysts' estimates of $9.81.

And with Fundstrat Global Advisors' Tom Lee forecasting the S&P 500 to end this year at 4,800, there is still some room for BlackRock's AUM to grow. This also implies that its revenue and earnings could rise yet more, which is good news for its shareholders.

A defensive balance sheet

Based on its operating results, BlackRock is a fundamentally strong stock. But can the same be said of its balance sheet? To find out, let's look at the interest coverage ratio, which is a measure of how much money a company generates to pay its interest expenses based on earnings before interest and taxes (EBIT).

BlackRock's interest coverage ratio improved from a lofty 29.9 in the first nine months of last year to 40.1 in the same period this year.

This means that, for the company to be unable to pay its interest costs, its EBIT would need to fall 97.5%, its interest expenses would need to increase exponentially, or a blend of the two would need to materialize.

Although these reverses aren't impossible, they aren't very plausible given that BlackRock is poised to benefit from the trend of gradually rising equity prices. Even inevitable bumps in the road in the stock market probably wouldn't jeopardize its status as a going concern considering the strength of its balance sheet.

A safe and growing dividend

BlackRock's healthy balance sheet also serves a purpose beyond ensuring that the company will likely be in business years from now. Its balance sheet, along with consistent profitability, have enabled the company to raise its dividend for 12 consecutive years. And that dividend growth streak appears as though it has plenty of fuel left in the tank.

That's because its payout ratio -- how much of net income it devotes to dividends -- will rise just a bit from a modest 42.9% in 2020 to the the mid-40% range this year, a level still on the conservative side. This leaves BlackRock with plenty of room to afford its payout even in the event of a market downturn, which would temporarily lower revenue and earnings.

And with analysts forecasting 14% annual earnings growth during the next five years, the company should be able to continue delivering low-double-digit annual dividend increases in that period. This kind of growth potential, along with a safe and market-beating 1.8% dividend yield, is what makes BlackRock a buy, provided it's trading at a fair valuation.

Top-notch quality at a fair price

At $931 a share, the company trades at a forward price-to-earnings ratio of 22.5 based on the $41.35 in adjusted EPS that analysts expect over the next four quarters. This means that BlackRock is priced at only a slight premium to the S&P 500, which is trading at a forward P/E ratio of 21.3.

Despite all of the characteristics that make it an ideal dividend growth stock, the stock doesn't appear to be overpriced. That's why dividend growth investors should consider adding BlackRock to their portfolio.

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Kody Kester owns shares of BlackRock. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.


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