Magellan (ASX:MFG) share price sinks 11% as Barrenjoey bites

Why are Magellan shares plummeting today?

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The Magellan Financial Group Ltd (ASX: MFG) share price is coming under pressure today.

Magellan shares are currently down a nasty 10.99% to $45.77 a share. This move comes after the wealth manager reported its earnings for the 2021 financial year this morning.

As my Fool colleague James Mickleboro covered earlier today, Magellan reported a 9% increase in funds under management (FUM), as well as a 10% jump in profit before tax and performance fees.

However, Magellan also reported its net profits after tax declined by a steep 33% to $265.2 million. Its adjusted net profit after tax also fell by 6% to $412.7 million. The company’s dividends for FY21 also went backwards by 2% compared to the previous year.

It’s probably the latter metrics that are concerning investors today and sending the Magellan share price down. According to a report in The Australian today, the fall in adjusted net profits after tax can largely be blamed on “direct investments made by Magellan Capital Partners. As well as Magellan’s new products and strategies including its investment in the Barrenjoey investment bank start-up”.

Barrenjoey investment weighs on Magellan share price

According to Magellan’s annual report, the company now owns a 40% stake in Barrenjoey.

Magellan chair Hamish Douglass stated in the report that Barrenjoey is primarily responsible for the after-tax loss of $41.8 million from Magellan investments in Barrenjoey Capital Partners. This was the result of Barrenjoey’s “large start-up costs as their executives build out the team, onboard clients and set up the required infrastructure”. Also contributing are its 12% stake in fast food chain Guzman y Gomez and the 15% share of FinClear Holdings Ltd.

However, Douglass was emphatic in his support for Barrenjoey. Here’s some of what he said:

Does this concern us in any way? Not in the slightest. These costs were anticipated, and we are confident both in the prospects for each of these investments and that they will add to building a stronger Magellan over time. At Magellan, we do not focus on short-term earnings or performance and that will not be changing.

Even so, investors have clearly not been entirely mollified. That’s judging by what has happened to the Magellan share price today after these earnings became public.

At the current pricing, Magellan shares have a market capitalisation of $8.57 billion. It also has a price-to-earnings (P/E) ratio of 21.13 and a trailing dividend yield of 4.7%.

The company’s shares are now down around 13% year to date in 2021 so far. They are also down around 27% over the past 12 months.

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Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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