As a dividend growth investor, I am constantly on the lookout for new opportunities that will increase my annual dividend income. Sometimes I analyze stocks I already own and consider adding more, while other times I focus on new positions that can strengthen my dividend growth portfolio. In this article, I will analyze a new candidate for my portfolio.
In my dividend growth portfolio, I lack exposure to the financial sector. In this sector, I own stocks in banks like Bank of America (BAC), insurance companies like Prudential (PRU) and fund managers like T. Rowe (TROW). In this article, I will analyze a leading investment bank in the United States, Goldman Sachs (NYSE: GS) to which I have no exposure.
I will analyze the company using my dividend growth stock analysis methodology. I use the same method to make it easier to compare analyzed stocks. I will examine the fundamentals, valuation, growth opportunities and risks of the business. I will then try to determine if it is a good investment.
According to Seeking Alpha’s business overview, the Goldman Sachs Group, a financial institution, provides a range of financial services to businesses, financial institutions, governments and individuals worldwide. It operates through four segments: Investment Banking, Global Markets, Asset Management, and Consumer and Wealth Management. The company was founded in 1869 and is headquartered in New York, New York.
Goldman Sachs’ revenues have more than doubled over the past decade. Revenues increased as the market performed well, and this allowed Goldman to charge more and manage more assets as it increased the value of Assets Under Watch (AUS). Looking ahead, analyst consensus, as seen on Seeking Alpha, expects Goldman Sachs to suffer a revenue decline in 2022, followed by a solid single-digit increase in subsequent years. as the market stabilizes following the rise in interest rates.
EPS (earnings per share) grew at a much faster rate. The reason for this is that in addition to increased sales, the company also enjoyed improved margins as it maintained high efficiency. Additionally, the significant share buyback following the 2008-09 financial crisis also supported higher EPS growth. Looking ahead, analyst consensus, as seen on Seeking Alpha, expects Goldman’s EPS to decline in 2022 as we enter the bear market, followed by single-digit annual growth in the next 3 years.
Goldman Sachs has increased its dividend over the past 10 years. The company reduced the dividend payment slightly during the financial crisis of 2008-2009, but the current dividend of $2 per quarter is more than four times the 2009 dividend. The dividend is extremely safe with a payout ratio of 16 %, and even with declining earnings, that nearly 3% yield looks safe for dividend growth investors.
The number of shares outstanding has decreased significantly over the past decade. Goldman Sachs repurchased 28.6% of its shares, which means more than one in four shares were withdrawn. When used by a growing company, buybacks are beneficial for EPS growth and are a great way to return capital to shareholders in addition to dividends. Goldman could increase buybacks if it passes the 2022 stress test.
Goldman Sachs shares are trading at an attractive P/E (price to earnings) ratio. The company is trading at 7.5x estimated EPS for 2022 based on analyst consensus as seen on Seeking Alpha. The chart below from FAST Graphs highlights just how attractive Goldman Sachs’ valuation is, as it trades well below its average P/E ratio of 12.5. Although the current expected growth rate is below the historical average, stocks still look attractively priced.
Additionally, when we look at the P/B (price to book value) ratio, which is a very important metric for valuing a bank, we see that Goldman Sachs is currently trading below its book value. Just a few months ago, the company traded at a significant premium to its book value. When a bank trades at a price below its book value, it implies that the shares are priced attractively.
To conclude, Goldman Sachs is a top notch investment bank. It has performed well over the past decade and benefited from rising revenue and EPS, which has led to increased dividends and redemptions. This strong package is offered at an attractive valuation as the P/E ratio and P/B ratio signal that the current price may be an attractive entry point.
The first growth opportunity is the wealth management segment. During the first quarter of 2022, this segment recorded record revenues. This segment accounts for about 18% of revenue, and when market volatility is high as it is today, Goldman Sachs can shine. The company is reputable and well known and has a track record to show long-term success. When the risks are higher, investors prefer trusted and well-known brands and Goldman Sachs is one of them. Thus, many leading companies choose Goldman for their employees.
The company’s leadership position will also allow Goldman Sachs to expand its value proposition. As we see fintech stocks drop by more than 80% at times, Goldman Sachs can take advantage of its strong position to acquire some and become an even bigger player. The company has already done this over the past few years, and the current environment will be a great M&A environment for industry leaders.
Moreover, Goldman Sachs, as a leading financial institution, is constantly under close scrutiny from regulators. Although this is often a downside, when the economy suffers from greater uncertainty it is a plus because investors know the bank is stable and safe. At the end of the month, the stress test results for 2022 will be released, and Goldman Sachs should pass them again, boosting confidence and likely increasing dividends and buybacks.
A recession is the biggest risk for Goldman Sachs. A recession will most likely keep the stock price low and therefore the AUS of the company will be low. This, in turn, will trigger downward revisions to the company’s EPS and revenue and current estimates may turn out to be higher than expected. Therefore, a recession can hamper medium-term business growth.
Investment banks are more susceptible to recessions because of this. They tend to outperform during bull markets and underperform during recessions when the AUS drops, and some clients have even taken money out of the funds. During the 2008-2009 financial crisis, Goldman fell more than the broader market and its earnings fell more than the average S&P 500 company.
In addition, there is also the risk of competition. Goldman Sachs competes with other major investment banks such as Morgan Stanley (MS) and JPMorgan (JPM). The company also competes with cheaper alternatives like ETFs and startups that claim to be better wealth managers using technology and better analytics.
Goldman Sachs is a big blue chip company. The company has demonstrated excellent execution with long-term improvement in fundamentals. Higher sales led to higher EPS, which allowed the company to pay dividends and buy back more of its own shares. In addition, the company has several growth prospects both organic and inorganic with mergers and acquisitions, as the valuation of many companies is significantly lower.
Although there are some risks, they are mainly short to medium term as fears of a recession increase. Although I do not rule out these risks, the current assessment takes them into account for the most part. The P/E is well below average and the shares are trading below book value. Therefore, I think Goldman Sachs is a BUY for long-term dividend growth investors.