It has been a good year for Macquarie Group (ASX: MQG) shareholders. The company released its full year results earlier this month showing a 17% increase in net profit after tax. The increased earnings helped the board to declare $2 per share in dividends for the 2013 financial year, up from $1.40 in 2012, placing the company on a dividend yield of 4.6%. It is the highest dividend paid since 2008 and shows the company is slowly clawing its way back from those heady pre-GFC days.
The key metric that has led to the impressive 66.6% share price appreciation this year is (hopefully) the bottoming of return on equity (ROE). Pre-GFC, ROE was as high as 29.8%. In 2012 it hit a low of 6.8%. The 2013 financial year has seen ROE increase to 7.8%. While this is still low, it is potentially the turning point. Investors who picked this turnaround have been well rewarded!
Management certainly has more to do, as ROE is still a long way below Macquarie’s cost of capital. Some, perhaps most, of this is already baked into the current share price but it does create some momentum for the stock price should ROE continue to increase.
Talking of ROE, one disappointment over recent years for shareholders has been the board’s decision to override the long-standing employee profit-share arrangement and pay bonuses even though the hurdle for ROE hasn’t been met. Macquarie is known as the ‘millionaires’ factory’ for the generous bonuses it pays. Previously, shareholders believed the bonus/incentive program protected them in lean times by not rewarding lacklustre performance. It now seems whether good or bad performance, bonuses get paid.
As the chart below shows, Macquarie has not only outperformed the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) by over 40% since June 2012 but it has also outperformed peers in the banking sector, including ANZ (ASX: ANZ), which has had the lowest share price growth of the majors, and also Westpac Banking (ASX: WBC) which, in share price appreciation, is the best performing. Macquarie has also significantly outperformed its peers in the wealth management sector, including IOOF Holdings (ASX: IFL) and Clearview Wealth (ASX: CVW).
Source: Google Finance
It is still a tough market that Macquarie is operating in. In banking and financial services, it is gaining ground through initiatives such as expanding into the home-loan market. The funds management division is a very solid business with $347 billion of assets under management. The two divisions investors are watching for a pick-up are the corporate & asset finance and Macquarie Securities. These two divisions would get a boost should merger and acquisition deals increase, coupled with higher stock market activity.
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Motley Fool contributor Tim McArthur owns shares in Macquarie Bank.