Macquarie Group Ltd (ASX: MQG) shares have enjoyed a nice rally this week following a pretty subdued market reaction following the release of its 2016 full year results last Friday.
Although Macquarie increased its earnings per share (EPS) by 23% for the full year, its FY17 outlook was below market expectations. The group is expecting to deliver essentially flat earnings over the coming year as a number of its key markets are still experiencing subdued market conditions.
This, however, does not change the longer term outlook for the company and I believe Macquarie remains a far more attractive investment than any other bank or major financial institution in Australia.
Here are five reasons why I think this is the case:
- Not overly exposed to residential property in Australia – I believe some pockets of Australia's residential property market remain unsustainably over-valued and this may pose a problem for our major banks down the line. Unlike the major banks, Macquarie has an Australian mortgage portfolio of just $28.5 billion, meaning it is far less exposed to a potential downturn in the Australian property market.
- Globally diversified operations – As the chart below illustrates, Macquarie is diversifying its income base away from Australia.
In FY16, the group generated 68% of its overall income from offshore markets and this is expected to increase further as the company looks to take advantage of growth opportunities not limited to the Australian market.
- The lower Australian dollar is a tailwind for Macquarie – According to the company, a 10% movement in the Australian dollar is estimated to have an approximately 7% impact on full year NPAT. With the potential for the RBA to further cut rates, there is a good chance investors could see the Australian dollar fall significantly from current levels.
- Efficiency and stability through scale – Macquarie is Australia's largest asset manager with $476.9 billion in assets under management. This provides a solid platform for a recurring revenue base whilst also delivering economies of scale for the group as a whole. As the chart below demonstrates, Macquarie's annuity style business have grown strongly over the past five years and now make up around 70% of the group's performance.
- Attractive dividend for income investors – While only 40% franked, investors are still presented with an attractive dividend yield of 5.7% at the current share price. What is interesting to note is that Macquarie's payout ratio is just 66% – far below the major four banks. I think this is a positive for shareholders as it will allow the group to re-invest capital back into new growth opportunities or further strengthen its balance sheet which will limit the need for capital raisings.
While all of these points are positives, investors should note that Macquarie is an inherently more risky investment proposition than most other major equities listed on the ASX. It has a beta of 2, which means it likely to be twice as volatile as the average stock on the ASX. It is also highly leveraged to global equity markets and therefore only suitable for investors with a higher than average tolerance for risk and volatility.
Foolish takeaway
While most investors will have some exposure to the big four banks, I think Macquarie provides an attractive alternative for investors comfortable with a higher level of volatility. It does not face the same headwinds faced by the major banks in Australia and will benefit greatly if the currency depreciates further.
Macquarie Group might not be for everyone, but here are three more blue chip stocks that I think are also better buys than the big four banks.
