Federated Hermes FHI has been benefiting from rising assets under management (AUM). A manageable and strong liquidity position, and sustainable capital distribution activities are encouraging. However, increased expenses are near-term concerns.

Factors Fuelling Federated Hermes

Acquisition of Money Market Assets: Acquiring money market assets depicts the buoyancy of Federated Hermes in the money market business. The company’s money market assets increased 10.5% in the first nine months of 2024 from the same period in 2023. Increased money market AUM will provide the company with various new fund offerings that would benefit its clients.

Rising AUM Balance: Over the years, the company has inked deals and expanded operations in the strategic markets. The buyout of C.W. Henderson and Associates, Inc. in 2022 expanded its separately managed account (SMA) business. The company continues to seek alliances and acquisitions to expand its business globally. Its average AUM witnessed a five-year (ended 2023) compound annual growth rate CAGR of 11.9%, with the uptrend continuing in the first nine months of 2024. Its inorganic growth efforts are expected to continue to drive the AUM balance in the long term.

Impressive Capital Distribution: As of Sept. 30, 2024, FHI’s long-term debt was $348 million. Its cash and other investments were $565 million as of the same date. A strong liquidity position aids its capital distribution move. The company has regularly paid out dividends since its initial public offering in 1998. In April 2024, it hiked its quarterly dividend 10.7% to 31 cents per share. It also pays special dividends from time to time, the latest being $1 per share paid out in May 2024.

The company also has a share repurchase plan in place. In October 2024, the company authorized an additional share repurchase program of up to 5 million shares with no expiration date. As of Sept. 30, 2024, 1.24 million shares were available under the share repurchase program.

Superior Return on Equity (ROE): Federated Hermes’ trailing 12-month ROE reflects its superiority in utilizing shareholders’ funds. The company’s ROE of 29.85% compares favorably with 12.87% for the industry.

What’s Hurting Federated Hermes

Rising Expenses: Rising operating expenses are concerning for FHI. Though the metric declined in 2021, it witnessed a five-year (2018-2023) CAGR of 8.7%. The uptrend continued in the first nine months of 2024. The rise was primarily due to intangible asset-related costs. Going forward, any expected increase in distribution expenses and new hires might escalate the cost base.

High Dependence on Investment Advisory Fees: Net investment advisory fees contribute a substantial portion to the total revenues of Federated Hermes. In the first nine months of 2024, it comprised 67.2% of total revenues. Significant fluctuations in the fair value of securities held by, or the level of redemptions from, the funds or other products advised by the company may materially affect the amount of managed assets. This will, thus, create a hindrance to the company’s revenues and profitability.

Federated Hermes’ Zacks Rank & Price Performance

Currently, Federated Hermes flaunts a Zacks Rank #1 (Strong Buy). Over the past year, shares of the company have gained 25% compared with 39.6% rise recorded by the industry.

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Other Finance Stocks Worth Considering

Some other top-ranked peer stocks are Robinhood Markets, Inc. HOOD and Raymond James Financial, Inc. RJF.

Estimates for HOOD’s current-year earnings have been revised upward in the past 30 days to 83 cents per share. The company’s shares have gained 75.3% in the past six months. It currently sports a Zacks Rank #1. You can see the complete list of today’s Zacks Rank #1 stocks here.

Estimates for RJF’s current-year earnings have been revised upward in the past 30 days to $10.94 per share. The company’s shares have risen 33.5% in the past six months. It currently carries a Zacks Rank #2 (Buy).

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