Federated Hermes, Inc. FHI is well-positioned to gain from its steady improvement in assets under management (AUM) balance in the near term. Further, backed by a decent liquidity position, its sustainable capital distribution activities are likely to continue enhancing shareholder value.

Over the past month, shares of FHI have gained 8.7%. It has outperformed its industry, and close peers — Artisan Partners Asset Management Inc. APAM and BlackRock, Inc. BLK.

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What Makes FHI Stock Worth Betting on

Strength in Money Market Sector: Acquiring money market assets depicts the buoyancy of Federated in the money market business. FHI’s money market funds witnessed a five-year (ended 2023) compound annual growth rate (CAGR) of 10.5%, with the uptrend continuing in the first nine months of 2024 compared with the same period in 2023. Moving forward, management expects the market conditions for money market strategies to remain favorable, with money market fund yields continuing to offer an attractive alternative to direct market instruments and bank deposit rates. We project money market funds to witness a CAGR of 6.2% by 2026.

Solid AUM Balance: The company has witnessed solid AUM growth over the past few years. Its total AUM witnessed a five-year (ended 2023) CAGR of 10.5%, with the uptrend continuing in the first nine months of 2024. The company’s diversified AUM base, along with strong growth in the money market, is expected to continue to drive the AUM balance in the long term. We project total AUM to witness a CAGR of 3.6% by 2026.

Strong Balance Sheet Position: Federated has a robust balance sheet. As of Sept. 30, 2024, the company’s long-term debt was $348 million. Its cash and other investments were $565 million as of the same date. Hence, given a decent liquidity position and manageable debt levels, the company has a lesser likelihood of defaulting on interest and debt repayments in the near term, even if the economic situation worsens.

Impressive Capital Distribution: Federated’s capital distribution activities are encouraging. In October 2024, the company authorized an additional share repurchase program of up to 5 million shares with no expiration date. Earlier in June 2022, it authorized a share repurchase program of up to 5 million shares of common stock. In the first nine months of 2024, the company repurchased 3.5 million shares. As of Sept. 30, 2024, approximately 1.24 million shares remain available under the share repurchase program.  

Apart from share buybacks, the company has regularly paid dividend since its initial public offering in 1998. In April 2024, the company hiked its quarterly dividend by 10.7% to 31 cents per share. The company has increased its dividend four times in the past five years and currently has a 32% dividend payout ratio. FHI also pays special dividends from time to time, the latest being $1 per share paid in May 2024.
 
Similar to FHI, BLK increased its dividend five times over the past five years, while APAM raised its dividend 13 times over the same time frame. Currently, BLK pays a quarterly dividend of $5.10 per share with a payout ratio of 49%, while APAM pays 71 cents per share with a payout ratio of 87%.

Given the balance sheet strength and continuous usage of cash for capital distribution, we believe FHI is well-poised to boost shareholder value.

Earnings Strength: Federated has an impressive earnings surprise history. Its earnings surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average surprise being 9.35%. In the last three to five years, the company witnessed earnings per share growth of 4.85%. 

Although FHI’s earnings are projected to decline 8.53% in 2024, it is expected to rebound and grow 35% in 2025.

FHI’s Earnings Estimates

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Should You Invest in FHI Now?

Federated’s steady rise in AUM balance driven by its rising money market funds, along with balance sheet strength, is likely to support its financials in the long term.  Also, its capital distribution activities seem sustainable, given its decent liquidity position. 

Given its strong fundamentals and earnings strength, FHI stock looks like an attractive investment pick now. The Zacks Rank #1 (Strong Buy) supports our thesis. You can see the complete list of today’s Zacks #1 Rank stocks here.

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