It's hard to look past Macquarie Group Ltd (ASX: MQG) in terms of quality.
The company has paid a dividend every year since listing in the mid-1990s and, even though its share price rise looks modest compared to CSL Limited (ASX: CSL), it has still delivered returns of around 13% per annum (before dividends) to shareholders since 1999.
Most recently, Macquarie shares have come under selling pressure after some signs of slowing growth and lower performance fees in its most recent quarterly report. Falling markets have also taken a toll by reducing the value of Macquarie's funds under management, and thus the fees it can charge.
Additionally, domestic concerns that have been responsible for the collapse in share prices of Commonwealth Bank of Australia (ASX: CBA) and Australia and New Zealand Banking Group (ASX: ANZ) are impacting Macquarie, which has also has domestic lending businesses.
Macquarie shares are down 20% in the past month, and they're just about cheap enough to get me interested. Investors gain a well-capitalised bank that is unlikely to have to raise much additional capital, and one that also has significantly better prospects throughout the banking cycle than the 'Big Four'.
A focus on annuity-style earnings over the past few years, from businesses like funds management, toll roads, mortgage finance, aircraft leasing, and so on generates significant recurring revenue for Macquarie, and should help to smooth out the inevitable ups and downs in its earnings caused by gyrations in 'capital markets' (commodity markets, global stock markets etc).
Macquarie also has a decent pipeline of opportunities to take advantage of, such as a recent venture into the Chinese aged care market, as well as its recent conditional bid for Onthehouse Holdings Ltd (ASX: OTH). Onthehouse rejected that bid, but with Macquarie's global reach and funding, I don't see it running out of opportunities.
Excluding intangible assets and using the figures from last year's (2015) full year report, Macquarie appears to trade on a Price to Book (total assets minus total liabilities) ratio of around 1.7, which is not bad for an Australian bank and lower than Macquarie's long-term average. Loan assets are the single-biggest asset category, making the bank vulnerable to a downturn in lending activity, and investors should still consider Macquarie to be quite cyclical.
I also believe that there is a reasonable risk that Macquarie's earnings will fall in a coming reporting period as a result of a lending slump or market upsets, given the macroeconomic risks in Europe, China, and right here in Australia.
As a result of the risks – and a little bit of greed – I'm unlikely to buy Macquarie Group shares above $60. However it is beginning to look attractive and its significant overseas income combined with a 5.4% dividend is not to be overlooked. Should shares fall further, I will begin to get quite interested.
