The Netwealth Group Ltd (ASX: NWL) share price has jumped over 50% in the past year, as shown on the chart below. The company has demonstrated its ability to deliver capital growth and dividend income.
The company provides a platform that enables financial intermediaries and clients to invest and manage a wide array of domestic and international products.
Netwealth's offering includes non-custodial administration and reporting services, self-managed superannuation fund (SMSF) administration, managed funds, managed accounts, investor-directed portfolio services, and superannuation products.
The company has achieved earnings growth since it was listed in late 2017, which has enabled excellent dividend growth.
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Growing dividends
Netwealth has grown its annual dividend every year since it first started paying one in 2018, which is a commendable record.
The 2023 financial year saw the annual payout increase by 20% to 24 cents per share. The FY23 annual dividend was around double the size of the FY19 payout of 12.1 cents per share.
Netwealth's excellent dividend growth has continued in FY24, with the interim dividend hiked by 27% year over year.
The last two declared dividends come to 27 cents per share, translating to a fully franked dividend yield of 1.3% and a grossed-up dividend yield of 1.9%.
At a time when the Reserve Bank of Australia (RBA) cash rate is above 4%, the Netwealth dividend yield is not particularly appealing, so I wouldn't call Netwealth shares a buy purely for the passive income.
But we should consider other elements of the investment thesis, not just its dividend potential.
Strong operational performance and margins
Netwealth is delivering strongly on growing its core metrics.
The update for the three months to 31 March 2024 showed funds under administration (FUA) had reached $84.7 billion, an increase of $6.7 billion over the quarter. The FUA growth over 12 months was 28.5%.
It reported FUA inflows of $5.2 billion for the three months to March 2024, which was 40.7% higher than the prior corresponding period. The FUA net inflows for the quarter were $2.7 billion, up 62.2% year over year.
Netwealth also reported its funds under management (FUM) reached $19.7 billion at 31 March 2024, an increase of $1.6 billion for the quarter. FUM net inflows for the quarter were $0.6 billion.
This level of FUA and FUM growth can help drive the company's earnings higher because it contributes to revenue growth. As a digital platform business, Netwealth can benefit from operating leverage, leading to profit rising faster than revenue.
Netwealth says it's highly profitable, with a strong earnings before interest, tax, depreciation and amortisation (EBITDA) margin of 47.6% in the HY24 result. It also has "strong cash generation" and a very high level of recurring revenue, resulting in predictable revenue.
The broker UBS currently rates Netwealth as a buy because of the "strong" quarterly FUA and inflow numbers. The broker has a price target of $22.50 on Netwealth shares, implying a possible rise of more than 10% over the next 12 months.
