Over the last 12-36 months I have written multiple times that I thought shares in investment bank Macquarie Group Ltd (ASX: MQG) offered decent value thanks to their valuation and attractive yield in the region of around 5%-5.5%.
The bank reported some strong full year numbers last week that included a record profit of $2,21 billion, up 7.5% on the prior year, a full year dividend up 17%, and a second half profit up 11% over the prior half.
Of course when it comes to investing it's the future that counts, not the past, but I still think Macquarie Group could provide investors market-crushing total returns over the next 3-5 years.
Below I have seven reasons to consider buying shares today.
- Strong second half – The bank's capital markets-facing businesses propelled it to a strong second half result for the period ending March 31 2017 on the back of renewed global confidence and strong capital markets after the November 2016 election of U.S. President Donald Trump. This momentum could continue at least through to the period ending September 30, 2017.
- President Trump – The new American President's flagship policies may provide a big boost to Macquarie over the medium term. In particular its compliance costs may reduce, while a promised $1 trillion spend on infrastructure could prove a mini-windfall for a bank that specialises in earning fees on just about every part of infrastructure investment.
- Tax cuts – However, it's Trump's promise to slash corporate tax rates in the U.S. that Macquarie's usually conservative CEO has repeatedly acknowledged is likely to make a real difference to the bank's bottom line. Much of the extra profits could head straight into shareholders' pockets via higher dividends and translate into share price gains.
- Green Investment Bank – the politically controversial deal to acquire the UK's GIB is a major coup by Macquarie in securing an asset that has potential to grow its assets under management, balance sheet, and profitability at a decent clip. The trend towards low-carbon investing will accelerate and the deal is likely to be earnings per share accretive over the medium term. The deal also reflects one of the bank's core strengths I have covered many times in its dexterity.
- Overseas exposure – Macquarie offers Australian investors exposure to the strength of overseas capital markets including a potential rebound in Europe and the strong U.S. economy. It also offers exposure to a stronger U.S. dollar which Australian investors should consider getting a small amount of if they do not have already.
- Heavy insider ownership – this is a key feature for investors focused on the long term to look for in any investment. Macquarie's staff's interests are heavily aligned with shareholders via a remuneration structure that rewards high performance.
- Valuation – Selling for $94.65 the bank sells on a trailing price-to-earnings ratio of 14.4x which is not classically cheap, but given its guidance for earnings for FY 18 to be broadly in line with FY 17 it looks reasonable assuming it can achieve a marginal earnings beat.
Of course Macquarie also carries with it several big risks as an investment, including its capital adequacy, or the potential for a meltdown in global markets or the Australian economy fuelling bad debts and slashing capital market activity. An investment in Macquarie today then should only be for those comfortable in the global economic outlook and as part of a balanced portfolio.
