Raymond James Is Thriving in New Environment

Could the financial advice and brokerage firm Raymond James Financial Inc. (

RJF, Financial) successfully transition to the new, no-fee financial world?

That was a question I asked almost a year ago. After all, it was a company that generated a significant amount of revenue from brokerage fees.

The short answer is yes. Financial statements issued this year show the company continuing to grow both its top and bottom lines. Indeed, it is prosperous enough to have set aside nearly $2.5 billion for acquisitions, a dividend increase and a billion dollars’ worth of share buybacks.

As the following 10-year chart shows, investors also have confidence:

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About Raymond James

Based in St. Petersburg, Florida, the financial holding company deals in wealth management, investment banking, asset management and commercial banking. Over the past decade, it has grown revenue by an average of more than 10% per year:

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If its recently announced acquisitions close as expected, the company will expand both its footprint and its revenue. On Oct. 20, it announced its intention of acquiring TriState Capital Holdings Inc. (

TSC, Financial) in a deal worth $1.1 billion at the time it was announced.

Raymond James’ Chairman and CEO described the acquisition target this way in a press release: “TriState Capital has a terrific, client-centric franchise focused on serving clients with premier private banking, commercial banking and niche investment management products and services.” The deal could close in 2022 (with no specific date specified).

On July 29, it announced a $387 million deal that would see it acquire the British wealth management company Charles Stanley Group PLC (

LSE:CAY, Financial). This deal was expected to close in the fourth quarter.

The earnings of both acquisition targets are expected to be accretive after their closings.

Competition

In its 10-K for 2021 (ending on September 30, 2021), Raymond James stated that the financial services industry, of which it is a part, is intensely competitive. It added:

“Our ability to compete effectively is substantially dependent on our continuing ability to develop or attract, retain and motivate qualified financial advisors, investment bankers, trading professionals, portfolio managers and other revenue-producing or specialized personnel.”

Note that it sees competitiveness as driven by its people, rather than its brand name, products or pricing.

Although it does not name any competitors, there is at least one competitor of which investors should be aware: LPL Financial Holdings Inc. (

LPLA, Financial), which has outperformed Raymond James in the past five years:

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Risks

Among the risks noted in the 10-K are the following:

  • The Covid-19 pandemic: The company observed that it could lead to lower short-term interest rates, resulting in lower net interest income and fees from third-party program banks; volatility in brokerage and investment banking revenues; increased credit risk due to the vulnerability of some industries to pandemic effects.
  • As noted, its competitive stance depends on being able to attract and retain qualified “associates.” It also observes that compensation plans must be designed to discourage too much risk-taking.
  • Risks similar to those of other companies in the financial services sector, including pricing pressure.

Financial strength

Although Raymond James rates only a 4 out of 10 score for financial strength, it has, as the saying goes, “good bones”:

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As for free cash flow, we’ve seen evidence already that it must be significant: It has big acquisitions underway, it is increasing its dividend and it has set aside up to a billion dollars for share buybacks.

As the following 10-year chart shows, free cash flow shot up in the past two years:

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Profitability

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Raymond James receives a 6 out of 10 score for profitability, which again may be on the low side. As we see in the table, its net margin, return on equity and return on assets are near the industry average or above. Looking specifically at its ROE, we see it is ranked higher than 73% of the 748 companies in the industry. And on all three measures, it outperforms its own history.

Here’s what we see for annualized returns on its Summary page at GuruFocus:

  • Year to date: 54.66%
  • One year: 59.70%
  • Three years: 25.89%
  • Five years: 15.87%
  • 10 years: 17.65%

Dividends

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At first glance, it appears Raymond James pays only a modest dividend, but this five-year chart shows how the dividend yield fell victim to a rapidly rising share price:

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And, to its credit, the company has raised its dividend quite consistently over the past decade:

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The dividend payout ratio currently sits at 16, which is the lowest it has been in the past 10 years; that means there’s lots of room to grow it in coming years.

Share buybacks

As we saw above, Raymond James is prepared to spend up to $1 billion to buy back shares in its current fiscal year (2022). That would get it back on the path it took in fiscal 2019 and 2020 (fiscal years end on Sept. 30):

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Note that it executed a three-for-two common stock split on Sept. 21 of this year; shareholders received a 50% stock dividend on that date. In a press release, the company said, “The decision to split the stock was made based on a desire to maintain market price and liquidity levels in our stock that are attractive to a broad range of investors.” In other words, it would try to keep the cost per share from rising too much.

Valuation

The GF Value Chart concludes Raymond James is modestly overvalued currently:

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We see a price-book ratio that also signals overvaluation:

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The price-earnings ratio of 14.71 is only slightly above the Capital Markets industry median of 14.04. As for the PEG ratio, which factors growth into the price-earnings ratio, it is 1.33, indicating modest overvaluation (1.00 is considered fair value).

Modestly overvalued, then, is the consensus. Additionally, as this 10-year price chart shows, the price has gotten well ahead of the long-term trend:

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Gurus

With the exception of a couple of quarters in 2020, when the pandemic began biting, the gurus have bought more often than they have sold:

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Eleven of the GuruFocus gurus have positions in Raymond James; the three largest are:


  • PRIMECAP Management
    (Trades, Portfolio); at the end of September, it owned 9,984,742 shares, good for 4.85% of the firm’s total capital and 0.65% of its own assets under management. PRIMECAP added 10.64% to its holdings in the three months ending Sept. 30.

  • Glenn Greenberg
    (Trades, Portfolio) of Brave Warriors Advisors, who held 2,268,517 shares, representing 7.33% of its own fund assets. That represented a reduction of 7.03% from the previous quarter.

  • Ken Fisher
    (Trades, Portfolio) of Fisher Asset Management, who owned 1,183,897 shares, which made up 0.07% of its assets under management. That was an increase of 0.05% over the previous quarter.

Conclusion

Investors looking for a position in the financial services industry would be wise to put Raymond James Financial on their lists (they might also look at LPL Financial Holdings and its performance over the past five years).

The company enjoys a strong financial position, with much more cash than debt and free cash flow that should help it keep expanding. It is profitable, bringing in an ROE greater than 73% of its peers.

It pays a small dividend now and has repurchased shares reasonably steadily for a decade. Its share price is considered to be modestly overvalued, but perhaps that is to be expected when a company is growing quickly and has a rapidly rising share price.

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