How high can Macquarie Group Ltd go?

The investment bank could be set to keep hitting new highs.

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The $19 billion Macquarie Group Ltd (ASX: MQG) which has been dubbed the 'millionaires factory' thanks to its lavish compensation packages for employees is back in the limelight after unveiling a full-year net profit of $1.265 billion. The profit result was up 49% on the prior year. Meanwhile based on earnings per share (EPS) of $3.84, the result was up 53% on the prior year.

Macquarie also paid out $2.60 per share in ordinary dividends for the 2014 financial year which equates to a historic dividend yield of 4.3%.

Understandably, investors liked what they saw with the share price gaining nearly 5% since the results were released to hit a new 52-week high.  Shareholders over the past year have now enjoyed a gain of 32.5% which is an outstanding return when compared against both the 3.4% return from the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) and against the best performing of the banking majors – Commonwealth Bank of Australia (ASX: CBA) and its 11.6% return.

During the results release management stated they expect that profits in financial year (FY) 2015 should  be up on FY 2014, enough to broadly offset the realised gain relating to the distribution of Sydney Airport Holdings Ltd (ASX: SYD).

While management's statement implies underlying profit growth, it didn't exactly quantify the expected growth, leaving investors to now contemplate what growth to expect from Macquarie over the coming year and whether this is already reflected in the $60.55 share price.

Based on the FY 2014 EPS result, Macquarie is trading on a price-to-earnings (PE) ratio of 15.8. With a lack of domestic investment banking peers to compare with, some investors choose to look at foreign-based competitors such as Goldman Sachs Group Inc (NYSE: GS) for comparison. Annualising Goldman's March quarter earnings suggests the global leader is trading on a PE ratio of just 9.6.

On this comparison at least, Macquarie's stock looks to be well and truly fully priced.

Foolish takeaway

Of course the multiple ascribed to a stock should amongst other things reflect a company's future growth potential. Arguably the growth outlook for the smaller and more nimble Macquarie is very good and hence it deserves a high multiple.

The fortunes of investment banks are closely aligned with equity and capital markets, if these markets continue to improve then there is a good chance Macquarie will continue to grow its earnings and dividends in the coming year. This would certainly act as a tailwind to send the stock price even higher.

Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »