Brookfield Asset Management Inc: How a Low-Yield Stock Can Provide High Returns
Why BAM Remains a Top Pick for Dividend Investors
If you are a yield hunter, Brookfield Asset Management Inc (NYSE:BAM) likely won’t appear on your radar. As an asset manager, BAM has never been a particularly high yielder. The company even has multiple subsidiaries that provide more generous dividend yields than itself.
But I still believe that Brookfield Asset Management deserves income investors’ attention. I have liked the company so much that I wrote about it in my Income for Life advisory in March 2019. Since then, BAM stock has delivered a total return of about 48%, assuming automatic dividend reinvestment.
Of course, I’m no oracle. The reason why I dug Brookfield Asset Management stock was that, even though it didn’t offer a particularly high yield, it had huge potential for dividend growth. And that theme still applies today.
On February 13, the board of directors of Brookfield Asset Management Inc declared a quarterly cash dividend of $0.18 per share. The amount represented a 12.5% increase from its prior quarterly payout of $0.16 per share. The new dividend will be paid on March 31 to shareholders of record as of February 28. (Source: “Brookfield Asset Management Reports 2019 Net Income and FFO and Announces Three-for-Two Stock Split,” Brookfield Asset Management Inc, February 13, 2020.)
Looking back, BAM stock’s quarterly dividend rate has increased by nearly 60% over the past five years. (Source: “Distribution History,” Brookfield Asset Management Inc, last accessed February 26, 2020.)
The best part is that Brookfield has a rock-solid business to back its growing payouts.
Brookfield Asset Management Inc: Dividends are Rock-Solid
Brookfield Asset Management is one of the largest alternative asset managers in the world, with over $540.0 billion of assets under management. The funds are invested in real estate, infrastructure, renewable power, private equity, and credit.
BAM’s alternative investment products have a wide investor base that includes public and private pension plans, endowments and foundations, sovereign wealth funds, financial institutions, insurance companies, and private wealth investors.
According to Brookfield Asset Management’s latest earnings report, the company’s fee-bearing capital totaled $290.0 billion at the end of 2019. The amount more than doubled its $138.0-billion fee-bearing capital at the end of 2018. The increase was partly due to BAM’s acquisition of 61% of Oaktree Capital Group, L.P. in 2019. (Source: Brookfield Asset Management Inc, February 13, 2020, op. cit.)
As you’d expect, such a big jump in fee-bearing capital allowed the company to earn a lot more fees. In 2019, Brookfield Asset Management’s fee-related earnings, before performance fees, totaled $1.2 billion. That’s up 41% from the $851.0 million earned in the prior year.
BAM also reports something called cash available for distribution and/or reinvestment, which provides insight into earnings received by the company that can be used to pay dividends to its common shareholders or to be reinvested into the business.
In 2019, Brookfield Asset Management’s cash available for distribution and/or reinvestment, before realized carried interest, totaled $2.2 billion, about a nine percent increase from 2018. And considering that the company paid $620.0 million in total distributions to its common shareholders, its payout ratio arrived at 28%. (Source: “Q4 2019 Supplemental Information,” last accessed February 26, 2020.)
In other words, despite Brookfield Asset Management stock’s substantial dividend hikes over the years, the company was paying out less than 30% of its profits.
And that’s not all.
According to the company’s Investor Day presentation last year, management expects the company’s cash available for distribution and/or reinvestment, before carried interest, to grow to $5.1 billion within about five years. That’s more than double the amount it earned in 2019! (Source: “Investor Day,” Brookfield Asset Management Inc, last accessed September 26, 2019)
Given the expected growth in BAM’s business and the current conservative payout ratio, I wouldn’t be surprised to see the company announce oversized dividend hikes year after year.
One last thing to note about Brookfield Asset Management Inc is that the company will be going through a three-for-two stock split soon. The split will be done by way of a stock dividend.
To be specific, shareholders will get one-half of a Brookfield Class A share for each Class A and Class B share they own. The BAM stock dividend will be paid on April 1 to shareholders of record as of February 28. (Source: Brookfield Asset Management Inc, February 13, 2020, op. cit.)
After the split, the company’s quarterly dividend rate will go from $0.18 per share to $0.12 per share. But of course, there’s no change to the income that a BAM shareholder receives because they will own 50% more shares post-split.
As to why Brookfield Asset Management is implementing the stock split, the company said in its fourth-quarter 2019 letter to shareholders that “While splitting the shares has no effect on the value of the company, it costs us virtually nothing to do, and it has been our practice to do this, as it keeps the share price within a reasonable range for investors.” (Source: “Letter to Shareholders,” Brookfield Asset Management Inc, last accessed February 26, 2020.)
Bottom Line on Brookfield Asset Management Inc
With its latest dividend increase, Brookfield Asset Management stock offers an annual dividend yield of 1.1%, which is not a high percentage by any means.
But due to Brookfield Asset Management Inc’s continuous and sizable dividend increases, BAM stock investors can expect to collect much higher yield on cost in the years to come.