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Why the Macquarie Group share price is rallying today

The Macquarie Group Ltd (ASX: MQG) share price is rallying in early trade as the investment bank issued a profit upgrade and increased its interim dividend as it unveiled its half-year profit results.

Macquarie Group’s share price jumped 2.6% to $120.91 at the time of writing when the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) index is flat.

Management reported a 5% uplift in net profit over the same time last year to $1.3 billion for the six months ended September 30 and is tipping full-year net profit to be 10% ahead of FY18.

Investors got what they were hoping for as it’s probably one of the market’s worst kept secret that management would paint a rosier picture to its previous guidance for a flat FY19 result.

Management’s profit upgrade doesn’t include proceeds from the US$2.2 billion sale of Quadrant Energy to Santos Ltd (ASX: STO) in August this year. Macquarie owns 21.8% of Quadrant and depending on when the transaction closes (it’s expected to be in the December quarter), this means the investment bank’s FY19 profit could be upgraded again soon.

Shareholders can also look forward to a 5% increase to their interim dividend payment as Macquarie will distribute a $2.15 a share payout that is 45% franked.

The dividend increase stands in contrast to the banking sector with Australia and New Zealand Banking Group (ASX: ANZ) and National Australia Bank Ltd. (ASX: NAB) announcing flat dividends when they handed in their earnings report card earlier this week.

Strong commodity and international markets performance in the reported period helped drive profit growth as profits from the division surged 85% to $700 million.

But not all of Macquarie’s businesses are firing up. Net profit from its annuity-style businesses (such as its asset management and asset financing operations) have fallen 29% over the same time last year, although the business is bouncing back as it generated earnings that are 10% ahead of 2HFY18.

Costs are also rising fast. Operating expenses have increased 12% over 1HFY18 to $4.1 billion and that has contributed to the drop in the bank’s annualised return-on-equity (ROE) to 16.3% compared to 16.7% in the previous corresponding period and 16.9% in 2HFY18.

There will be a number of changes to Macquarie’s board with former Reserve Bank of Australia (RBA) board member Jillian Broadbent AO appointed as an independent director along with Philip Coffey and incoming chief executive Shemara Wikramanayake.

Overall, it’s a good result and Macquarie is one of my key stock picks for the anticipated upcoming Santa Rally.

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Motley Fool contributor Brendon Lau owns shares of Australia & New Zealand Banking Group Limited, Macquarie Group Limited, and National Australia Bank Limited. The Motley Fool Australia owns shares of National Australia Bank 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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