Stock & Industry Snapshot
To celebrate my first year as a contributing analyst on Seeking Alpha, I am closing out 2023 by covering one of the first stocks I covered last spring, and in one of my favorite sectors to write about, financials and banking.
Some quick facts about Morgan Stanley (NYSE:MS) are that it is NYC-based, trades on the NYSE, has roots going back to the 1930s, entered the retail brokerage space with its 2020 acquisition of E-Trade, and in addition to that has a diversified portfolio of business segments that include wealth management, investment banking, trading, research, and investment management.
My prior rating in August called for holding this stock, and since then it has gone up +6.3%
Compared to my initial rating in May when I recognized this stock as a long-term buy opportunity, it has since gone up +13%.
Recent sector performance from SA market data shows that the financials sector has improved nearly 30% in the last 3 years, but also has shown YTD improvement of +10%.
This is relevant in considering how much the sector bullishness in financials could be contributing to this stock continuing to rise or not.
We use a 9-point scoring method that looks at this stock holistically and assigns a total rating score, using a score matrix.
Based on the score total in the score matrix, this stock is getting a rating of hold.
This is a reiteration of my August rating of hold.
Compared to the consensus rating on Seeking Alpha, I am agreeing this time with the quant system.
Dividend Income Growth
What I am looking for is proven 10 year dividend growth, and you can see from my trend line I traced that this stock provided just that.
For example, it went from an annual dividend of $0.20/share in 2013 to $2.95/share in 2022, which is a +1,375% growth in 10 years. As a dividend investor, if I got 100 shares in 2013 and just held them until 2022, my annual dividend income on 100 shares would be $295.
Even more importantly, from the 2023 dividend history we see that FY23 has an annual dividend that is up to $3.25/share, so it continues to grow nicely, and also has not interrupted its quarterly dividend despite the 2008/2009 financial sector crisis or the 2020/2021 pandemic.
Also, since the income statement continues to show profitability and over $2B in quarterly earnings, I would make an educated guess that the company is in a position to be able to continue at its current dividend pace going into 2024.
For the reasons mentioned, in this rating category I give it a strong buy.
Dividend Yield vs Peers
Here I am looking to pick one stock with the best dividend yield for my capital invested, among 4 banking-sector peers, using Seeking Alpha’s yield comparison tool:
To construct this peer group, I picked 4 large financial stocks that are US-based and have a major market presence in similar business lines such as trading, investment banking, asset management, and wealth management.
Of this peer group, Morgan Stanley had the best trailing dividend yield at 3.47%, while Charles Schwab (SCHW) came in last at 1.44%. In the middle were Goldman Sachs (GS) and JPMorgan Chase (JPM).
I expect some continued modest bullishness in this sector, especially after the Fed’s December meeting, and going into 2024, so this could cause the yield to decline somewhat further.
I think the data shows in this category it earns a buy rating, with a yield of around +3.5% and winning this peer group. I would not call it a strong buy here unless we are looking at yields past 5%. As someone mentioned in a comment recently, you can also park capital in certain Certificates of Deposit (CDs) that pay over 5%, so I think paying attention to a competitive dividend yield is relevant in this high rate environment since that is how I plan my portfolio.
From the income statement data, let’s briefly discuss YoY revenue growth.
Impressively, the firm achieved $13.13B in total revenue in Q3, vs $12.95B in Sept 2022, a +1.38% YoY growth.
From their quarterly results, we can learn that two segments that drove revenue growth were wealth management and investment management.
Wealth management saw “higher average asset levels compared to a year ago. The quarter included continued strong positive fee-based flows of $22.5B.”
Investment management saw revenue “increased compared to a year ago on higher asset management revenues and AUM of $1.4T.”
A weak spot remained investment banking, which saw 27% declines driven by lower M&A activity.
Another notable data point to mention is related to the high interest rate environment. We can see from the income statement that while interest/dividend income climbed on a YoY basis, so did interest expense. In fact, it went from $3.59B in Sept 2022 to $11.32B in Sept 2023, a 215% YoY increase. This clearly had an impact on YoY net interest income growth that saw a decline.
With that said, my forward-looking outlook on revenue growth sustainability going into 2024 is that the elevated rate environment will continue to pressure net interest margins for a while longer but will not get worse than they are, while improved equity markets will drive higher fee-based revenue on assets managed as portfolio values go up, and if economic headwinds calm we could see an uptick in M&A activity which will benefit the investment bank.
In fact, an October study by the global Boston Consulting Group highlighted that “M&A Set to Pick Up in 2024 Despite Ongoing Headwinds.” The article went on list a driver of potential increased deal activity:
major support for dealmaking will come from the abundance of available capital held by sovereign wealth funds, private equity and venture capital investors, and some large companies.
From the evidence I presented, in this category I would call it more of a hold than a buy, on the basis that YoY revenue growth was practically flat and there is continued pressure on interest margins, however there is also potential tailwind in 2024 from the factors I mentioned, which could drive revenue performance improvements next year and the share price along with it.
Using the same income statement, we can see that there was a drop in earnings in Q3 to $2.4B, vs $2.63B in Sept 2022, an 8.7% YoY decline.
From quarterly results, the company speaks of a few drivers of higher expenses including higher comp expense. We can also see from the income statement that total operating expenses grew to $9.14B in Q3, from $8.7B in the same quarter a year prior.
As for forward-looking outlook, weak or flat top-line revenue growth if it continues will also impact the bottom-line since expenses have risen however the overall inflationary environment has improved, so I think those business costs impacted by price inflation will improve going into 2024.
Supporting this sentiment is data from Statista that shows monthly inflation is recently well below the peak it hit in summer 2022:
Therefore, I would call this stock a hold in this category, since earnings declined by less than 10%, and the firm is in a predicament of relatively flat YoY revenue growth combined with rising expenses, but at the same time the macro factors going into 2024 seem to shed some positive light, which is why I would hate to dump shares in this firm just yet.
Equity Positive Growth
I also consider positive equity growth as one of the key fundamentals of any serious business. From the balance sheet, we see that this is a very equity-rich firm at $100.15B in total equity as of Q3, however falling from $102.08B in Sept 2022, a 1.89% YoY decline.
I am not too concerned about this firm’s capital situation, as its Q3 results show a CET1 ratio of 15.5% which is far above any regulatory minimums under Basel III rules.
Keep in mind that Morgan Stanley also has its own bank called Morgan Stanley Private Bank, so it is under continued scrutiny and oversight of banking regulators in the US. It also means it can tap into any one of the Fed’s various tools in the event of a liquidity problem.
Morgan Stanley as a whole is also considered a global systemically critical bank, according to 2022 data from the Financial Stability Board.
My outlook here calls for a hold of this stock then, on the basis that equity growth declined however book value remains strong as does capital ratios and the vast size and scale of this firm and its role in the financial markets I think puts more eyes on it to try and prevent a financial meltdown before it occurs, due to lessons learned in 2008 and the systemic effect it would have.
That does not mean it is not prone to financial shocks, but that mechanisms have been put in place by the Fed to try and reduce systemic risk should they occur.
Share Price vs Moving Average
In a nutshell, I will keep this topic brief since the YCharts above speaks for itself.
We can see the current share price of $93.55 is about +11% above the 200-day simple moving average that I am tracking (orange line).
That is quite the leap, especially off of its October lows that were approaching $70. At the same time, though, it is still below its January highs that reached past $100.
We also cannot ignore the sector bullishness I mentioned earlier, helping to pull this stock up.
I will call this share price a hold at this level, since I think the better buy opportunity was this fall and now we face a potential for continued bullishness in this sector but the question is how much. So, I would not be ready to sell just yet, but also would not buy at this price considering their revenue and earnings did not really impress.
Had the share price been closer to the moving average, and earnings/revenue had grown by double-digits in Q3, I would have called it a buy.
From valuation data we can see that the forward P/E ratio is 16.94, or +50% above the sector average.
Driving this multiple of nearly 17x is definitely the bullish share price, which was proven by the price chart and also the declining earnings growth which fell nearly 9% YoY. This creates a wide rift between price and earnings in this case, and I would call it overvalued in this case.
Earnings have a ways go to if they will catch up to this overheated share price, so I expect the overvaluation to last a bit, hence I will call it a sell in this specific category.
Valuation: Price-to-Book Value
Also from valuation data, we can see the forward P/B ratio of 1.69 is also about +38% above its sector average.
In relation to share price and equity, I already have shown that the share price is very bullish/overheated while the equity growth is practically flat, although this firm’s book value is pretty high to begin with at over $100B in positive equity.
In this context, I would call it a hold and not a sell, since I think a multiple of 1.7x book value is not overvalued in this context. Had the share price been bullish but the equity had shown double-digit declines, then I would be more pessimistic on this valuation, but in this case we have flat equity growth.
A risk to mention, though perhaps not a huge one, is the fact that there is always risk when new management arrives at the top, since it could change the strategy and gameplan for a firm.
In the case of Morgan Stanley, all eyes will be on incoming new CEO Ted Pick.
Industry portal Mint.com had this to say in a late-December article:
When Ted Pick takes over as the new CEO of Morgan Stanley next week, the three-decade bank veteran’s frank manner and steady hand will help him steer the firm through a dealmaking slump.
Fast Company had this to say in its October piece on the new CEO:
Ted is a strategic leader with a strong track record of building and growing our client franchise, developing and retaining talent, allocating capital with sound risk management, and carrying forward our culture and values.
In my opinion, the firm picking a longtime company insider sends the message that the focus is on stability and security, since the board pretty much will know what to expect from Ted Pick. This will not be a Silicon-Valley wunderkind but a true banker, so I would argue that it will be in Morgan’s favor to stick to its fundamentals and that is being a Wall Street bank.
And, although M&A is an area needing growth, as I mentioned before it is such a diversified firm by now that it has penetrated retail brokerage with E-Trade, and also has a well-established wealth management shop. Based on Forbes magazine’s list of America’s top wealth advisors in 2023, Morgan had 4 of the top 20 wealth advisories in the country.
So, I think this new CEO will do what he knows best and that is banking, and in my opinion that is a good thing and just what Morgan Stanley needs if it will outcompete its peers.
I say based on this risk of new leadership, I would actually give it a buy rating because the best thing for this firm is a return to its fundamentals, and I think Ted Pick can do that.
To reiterate, I am keeping my hold rating on this stock from August.
Key drivers of this neutral sentiment are flat revenue and earnings growth, a bullish share price and overheated sector, while also the opportunity for proven dividend income growth and potential improvements in 2024 to net interest margins and M&A activity as new leadership takes the helm.
If I was trading this one, my portfolio strategy of holding this stock would be for the purpose of continued and stable dividend income and growth, and expected further price growth which will provide some modest unrealized gains for our portfolio.
As I write this on the last trading day of 2023, I want to thank my readers for your support in this my first year on this platform and want to take this opportunity to welcome your comments on Morgan Stanley because your constructive, evidence-based feedback is valuable. Let’s continue the discussion on this stock as we head into a new trading year!