Asset-light companies are a great way to add to portfolio diversification while also earning extra income. Asset managers are one such example, and while names like T. Rowe Price (TROW) and Franklin Resources (BEN) may first come to mind, I highlight the large and also well-respected Northern Trust (NASDAQ:NTRS), which has a long record of success in the asset management sector. In this article, I highlight why Northern Trust should be on an income and growth investor’s radar.
Northern Trust has been around for over 130 years and is a leading provider of wealth management and banking to corporations, institutions, and affluent households and individuals. It was founded in Chicago and, today, has a presence in 23 states, and 23 locations worldwide in Canada, Europe, the Middle East, and Asia Pacific.
A key aspect of Northern Trust’s business is its custody and administration services, with over $13 trillion assets in custody and administration. NTRS acts as a custodian and administrator for institutional clients’ assets, providing safekeeping and management of securities, cash, and other financial instruments. This business is highly regulated, and Northern Trust is well-respected for its compliance and risk management practices.
Another advantage comes from serving ultra-wealthy clients in the asset management side, which has over $1 trillion in AUM. This segment tends to be conservative, exposing less AUM to equity market swings, as highlighted by Morningstar in its recent analyst report:
Northern Trust’s wealth-management business is focused on serving the needs of ultra-wealthy clients. In particular, the global family office unit caters to clients with $200 million-plus in assets. Within the United States, Northern Trust’s wealth-management operations are well diversified across different regions.
We believe that Northern Trust’s sterling reputation, entrenched position, and client inertia help insulate it from competition. Another advantage Northern Trust has is that its ultra-wealthy clients tend to be conservative in asset allocation. Less than half of the segment’s AUM is invested in equities, with the remainder roughly split evenly between fixed-income securities and cash/other assets.
Meanwhile, NTRS continues to execute well against a challenging economic backdrop, growing revenue by 7% YoY in the third quarter. This was driven by the elimination of fee waivers and the positive impact of higher interest rates. These factors more than offset headwinds from a weaker equity and fixed income market, asset outflows, and a strong US dollar.
Headwinds to Northern Trust include an inflationary environment, as 9% growth in expenses resulted in flat earnings per share in the last reported quarter. Nevertheless, NTRS still generates an above-average return on common equity of 15%, and signs of easing inflation combined with a strong start to equity market valuations in 2023 bode well for NTRS this year.
Moreover, NTRS along with peers Bank of New York Mellon (BK) and State Street Corporation (STT) operates a virtual oligopoly in the custody management business. All three firms are spending heavily in technology, with Northern Trust having spent $800 million. This, combined with high switching costs, makes it difficult for smaller firms to compete for this business.
Importantly, NTRS carries a strong A+ rated balance sheet and has a safe common equity tier 1 capital ratio of 10.1%, sitting well above the 4.5% requirement for large banks. NTRS also yields a healthy 3.1%. The dividend is well covered by a 39% payout ratio and comes with a 5-year CAGR of 12.6%. Notably, NTRS has paid an uninterrupted dividend for 23 years, including through the Great Financial Crisis of 2008 – 2009, and through the most recent recession in 2020.
Turning to valuation, NTRS is attractively priced at $96 with a forward PE of 13.2, sitting well below its normal PE of 17.6 over the past decade.
While analysts expect flattish EPS growth this year, they expect annual growth to pick up in the 9% to 10% range in the following 2 years. Share buybacks could be a contributor to that. As shown below, while NTRS has not reduced its share count since 2021, a resumption in meaningful buybacks could give ~2% EPS contribution per year.
Northern Trust is a well-respected provider of asset management, custody and fund administration services to institutions and wealthy individuals. It has a diversified revenue stream and benefits from low customer attrition due to its entrenched position in the industry. Importantly, it has a strong track record of shareholder returns and is benefiting from higher interest rates. Finally, NTRS appears to be attractively valued for long-term income and growth investors at the current price.