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How Magellan Financial Group Ltd (ASX:MFG) just lifted its dividends 57%

A double tailwind from Magellan Financial Group Ltd’s (ASX: MFG) full year results has sent the stock soaring today to become the best performer on the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index.

Shares in the global fund manager surged 14.1% to $27.55 in lunch time trade with other listed fund managers like Platinum Asset Management Limited (ASX: PTM), Perpetual Limited (ASX: PPT) and IOOF Holdings Limited (ASX: IFL) rallying in sympathy.

Investors are excited because Magellan not only beat consensus profit forecasts for the year ended June 30, 2018 but unveiled a bigger-than-expected dividend.

What’s more, investors can keep expecting a big dividend handout from now on as the fund manager has lifted its payout ratio (the amount of profits it pays out as dividend) to up to 95% from 75% to 80%.

This would usually ring alarm bells as a payout ratio above 80% is either seen by the market as being unsustainable or a signal that the company has gone ex-growth as it won’t have enough left in the bank to fund its expansion.

In Magellan’s case, the market seems very comfortable with the new payout policy because the group has grown its capital base to a point where it can afford such a generous distribution and yet have around $20 million in the kitty for growth.

It’s also worth noting that funds management is not a capital-intensive business and Magellan’s co-founder and chief executive Hamish Douglass is aiming to generate low-to-mid teen returns for shareholders over the medium term.

The returns are not only bolstered by the fund manager’s reputation for picking good stocks but from a better-than-expected control on costs.

Operating expenses in FY18 came in at $101 million when analysts from Macquarie Group Ltd (ASX: MQG) were expecting $106 million. Magellan is forecasting expenses to only inch up slightly to around $105 million in FY19 and this is well below consensus of circa $116 million.

Magellan announced a 34% surge in revenue to $452.6 million and a 37% uplift in adjusted net profit to $268.9 million for FY18.

It also declared a final dividend of 90 cents per share, which takes its total dividend for the year to 134.5 cents per share – 57% above last year’s payment.

The bottom line was around 10% ahead of consensus expectations and the final dividend was more than 50% ahead of what Macquarie was expecting. It would be interesting to see if other fund managers feel the pressure to reconsider their own dividend policies.

I own shares in Magellan and I can’t find anything not to like with its earnings report card. Even with today’s surge in the stock, I believe the shares are still trading at around a price-earnings (P/E) of about 15 times for FY19 – once I factor in the expected consensus earnings upgrade.

However, if global share markets were to tumble on the back of rising geopolitical risks, Magellan will be one of the first few to get sold-off.

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Motley Fool contributor Brendon Lau owns shares of Macquarie Group Limited and Magellan Financial Group. The Motley Fool Australia owns shares of Platinum Investment Management Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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