Franklin Resources, Inc. BEN is well-positioned for growth on the back of acquisitions, solid assets under management (AUM) growth and an organic growth strategy. However, a rising expense base and concentrated revenues from investment management fees are major woes.

Tailwinds for Franklin

Acquisitions & Partnerships: Franklin has grown through acquisitions and partnerships in the past few years, enhancing its foothold. In July 2024, Franklin teamed up with Japan's SBI Holdings to focus on ETFs and emerging asset classes, including digital assets and cryptocurrencies, to help new generations of investors achieve their financial goals.

Also, the company plans a minority investment in Envestnet and has selected a single platform to unify investment management technologies to simplify its operations and reduce long-term capital expenditure.

In January 2024, the company completed the acquisition of Putnam Investments, a global asset management firm, from Great-West Lifeco. The transaction is likely to accelerate Franklin’s growth in the retirement space by increasing its defined contribution AUM to more than $100 billion.

Such efforts will help the company improve and expand its alternative investments and multi-asset solutions platforms.

Solid AUM Growth: Franklin has been witnessing solid growth in the AUM balance over the years. Though AUM declined in fiscal 2022, it saw a compound annual growth rate (CAGR) of 18.7% over the last five fiscal years (ended fiscal 2023). The rising trend continued in fiscal 2024.

Also, the company’s efforts to diversify its business into asset classes that are seeing growing client demand, such as alternative asset classes, are expected to propel AUM growth. A regionally focused distribution model has improved its non-U.S. business with favorable net flows . Moreover, acquisitions keep supporting AUM's growth. 

Strong Balance Sheet Position: As of Sept. 30, 2024, the company had a debt of $2.6 billion, which has been relatively stable over the past few quarters. Its liquidity (comprising cash and cash equivalents, receivables, and investments) as of the same date was $6.7 billion. Thus, a decent liquidity position and earnings strength reflect a lesser likelihood of defaulting on interest and debt repayments even if the economic situation worsens.

Impressive Capital Distribution: Franklin’s capital distribution activities have been remarkable over the years. In December 2024, the company declared a 3.2% increase in its common stock dividend, raising it to 32 cents per share from the previous payout. 

In December 2023, the company announced a repurchase authorization of 27.2 million shares of its common stock. This was in addition to the existing authorization, of which 12.8 million shares were available for repurchase at the end of November. The company repurchased 4.9 million shares of its common stock in the quarter ended Sept. 30, 2024. Such consistent capital distribution activities are likely to stoke investors’ confidence in the stock.

Near-Term Headwinds for Franklin

High Concentration on Investment Management Fees: Franklin’s investment management fees, its biggest source of revenues (comprising 79.9% as of Sept. 30, 2024), have been witnessing a volatile trend over the years. The investment management fees depend on the level and relative mix of its AUM, as well as the types of services provided. 

The company’s AUM is exposed to market fluctuations, foreign exchange translations, regulatory changes, and a sudden slowdown in overall business activities. The company recorded declines in the metric in fiscal 2020 and 2023. However, the same increased in fiscal 2021 and 2022. In fiscal 2024, investment management fees witnessed an upward trend. However, changes in AUM might hurt the metric and adversely impact Franklin’s financials.

Escalating Expenses: An escalating cost base has been concerning for Franklin. Though expenses declined in 2022 on lower sales, distribution and marketing expenses, as well as cost synergy realizations of $300 million from the Legg Mason acquisition, the metric witnessed a CAGR of 12.5% over the last four years (ended fiscal 2023). The uptrend persisted in fiscal 2024. The ongoing investment in technological advancements and talent acquisitions are likely to keep the expense level high, hurting bottom-line growth in the upcoming period.

Franklin's Price Performance & Zacks Rank

Over the past six months, shares of the company have lost 6.2% against the industry’s growth of 30.8%.

Image Source: Zacks Investment Research

Franklin currently carries a Zacks Rank #3 (Hold).

Finance Stocks Worth Considering

Some better-ranked investment management stocks are Victory Capital Holdings, Inc. VCTR and Janus Henderson Group plc JHG, each sporting a Zacks Rank #1 (Strong Buy) at present. You can see the complete list of today’s Zacks Rank #1 stocks here.

The Zacks Consensus Estimate for VCTR’s current-year earnings has been unchanged in the past seven days. Victory Capital’s shares have gained 40.6% over the past six months.

The Zacks Consensus Estimate for JHG’s current-year earnings has been revised marginally upward in the past seven days. Janus Henderson’s shares have risen 29% over the past six months.

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