In an interesting turn of events today, embattled Australian asset manager Magellan Financial Group [ASX:MFG] saw its shares surge by 18.15%, trading at $10.87 per share, despite its latest earnings report highlighting the struggles of its funds and profits.
Investors today have recovered almost half of the losses the share price has seen this year, as the company slogged through the first year of its five-year strategy shift to improve profitability.
While initial figures seemed challenging for the firm, its strong cash position and the issue of a 30 cent special dividend have given investors enough reason to buy today, bringing the company’s 12-month performance to a negative 22.30% fall.
It’s still a far cry from the company’s share price in 2020, which peaked at $72.40 per share.
Let’s explore the earnings in further detail and see if the strategy can lift Magellan in the future.
Source: TradingView
Magellan’s earnings slump
In a bold display of financial strength, Magellan announced a special dividend that resonated with investors today, countering the news of falling profits for the firm.
Magellan’s financial performance in 2023 has been marked by a 52% slump in net profit, settling at $182.6 million.
The dip can be attributed to a 22% drop in revenue, which stood at $431.7 million. This tumultuous year was compounded by low client redemptions, leading to a huge contraction of total funds under management from $61.3 billion to $39.7 billion.
Magellan went on the aggressive today, maintaining it was happy with its current position and offering a special dividend of 30 cents, bringing the total for the year to $1.167 per share.
The company reiterated that despite its poor performance this year, it remained focused on cost management and maintaining its strategy to stimulate growth.
Magellan CEO and Managing Director, David George, said today:
‘We have made a solid start to implementing our five-year strategy and have laid the foundation that can return us growth in time.’
‘These changes have facilitated early signs of performance improvement, in particular, in our Global Equities Strategy which outperformed the benchmark over the second half of the financial year and contributed $11.0 million in performance fees.’
As part of the changes, the company announced former Janus Henderson co-chief Andrew Formica as the new chairman.
He has said that his goal is charting a course to steer the asset manager back to prosperity, exploring the realms of mergers and acquisitions both within Australia and on the global stage.
The cost-cutting and wider growth are all part of CEO David George’s five-year strategy, outlined in late 2022, to return the company to its glory days.
Sadly, the glory was not seen in the firm’s investment funds performance this year, with its flagship, Magellan Global Fund, returning 20.6% over the year — versus the benchmark 22.4%.
While its Australian equities — the Airlie Australian Share Fund [ASX:AASF] — returned 18.1% compared to the benchmark of 14.8%.
The company said it had found strategies to improve its performance and remained committed to share buybacks, extending its program until April 2024. So far, 4.3 million shares have been bought for $47 million.
Outlook of Magellan’s strategy
As one of the top performers on the ASX today, investors welcome the resolve of the firm’s strategy and see the company as a discounted pick-up with a nice dividend payout.
The special dividend and cost cuts are a positive step for Magellan, but the company still faces several challenges.
It needs to rebuild its client base and restore its investment performance in order to attract new money.
The company recently launched a small cap investor fund, realising the potential for gains in the space at this point of the cycle.
However, the firm needs to show an extended outperformance of benchmarks to bring wary investors back into the fund.
Source: Eureka Report (Magellan in blue)
For a longer view, the company scrapped the headline of its strategy, which aimed for $100 billion of assets under management instead opting for realistic wins to drive confidence.
It shows pragmatism by leadership as the company reassess its priorities, such as its balance sheet. The company has, so far, managed it well with no debt and $373.4 million in cash.
Overall, strong performance in the share price today will give the company a boost of confidence moving forward.
Still, I suspect things will remain quiet for the company until a larger merger or acquisition further defines the firm’s trajectory.
Investing in active funds could seem risky to some after the past week’s sell-off. Instead, many are turning to dividend-paying companies as a defensive strategy.
But not all dividend payers are the same.
Royal Dividends
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Regards,
Charles Ormond,
For Money Morning
