My experience tells me it pays to have some exposure to a brokerage when the market is in the throes of getting healthy again. With the reversal of fortunes occurring within the financial sector recently, I believe it’s wise and timely to initiate a position in an institutional broker that pays a double-digit dividend yield and trades at a 35% discount to its 52-week high.
The highest-yielding investment bank traded is BGC Partners (NASDAQ:BGCP), a New York-based firm that does business all over the globe. The company serves wholesale markets for large institutional customers, making markets for derivatives, credit default swaps, foreign currencies, fixed income, equities, interest rate swaps and most other esoteric securities that are out of the realm of retail investors. The company also offers technology that enhances back-office operations, market data analysis and trade execution for specialized instruments.
BGC Partners is the former Cantor Fitzgerald, the firm that lost 658 employees in the Sept. 11 attacks on the World Trade Center. In August 2004, the company split its electronic futures trading platform from its money-brokering business, bringing about the birth of BGC Partners, named after its founder B. Gerald Cantor who started the company in 1945.
As a publicly traded partnership, shareholders participate in the majority of the firm’s profits though quarterly distributions, currently paid out at a rate of 17 cents per share per quarter, or 68 cents per share annually. At today’s price of around $6.90 per share, the current yield is 10%.
With offices in 35 markets, the company caters to some of the largest banks, hedge funds, investment banks, broker-dealers and governments in the world. As the global markets recover from one of the worst three-year periods for investment banking in the past century, BGC Partners should reward investors well by being well-positioned in most, if not all, of the world’s leading banking centers.
From the chart above, the rebound for BGCP shares has just begun. The stock broke its downtrend the first week of January and is now in the early stages of a new uptrend that will carry it as far as the global financial recovery will allow. At the height of its post-Sept. 11 rebound, the stock traded as high as $27 in late 2003. My one-year price target is $10.
Given that most of the current market’s participants are institutions rather than retail investors, I find it best to own a company that’s 100% focused on that kind of customer. The numbers for BGCP are just starting to turn north: Year-over-year quarterly revenue growth is up 20%, with the company raising its dividend payout from 65 cents to 68 cents in the third quarter of 2011. Insiders own 10.9%, or 12.9 million of shares outstanding, and the stock trades at a forward PE of 8.86, with revenues expected to grow by 8.5% for 2012 to $1.59 billion. The company beat earnings estimates by a penny in the third quarter of 2011.
On Dec. 19, 2011, BGCP management provided a Q4 update estimating that it will show revenues of $350 million to $380 million, an increase of 9% to 18% from the prior year’s quarter. Pretax earnings will be in the range of $48 million to $54 million, an increase of 6% to 19%, depending on the performance of the last two weeks of the year closed out. The company expects to maintain its quarterly dividend at 17 cents per share. This kind of pre-announcement is very reassuring.
The whole asset management sector, which has been absolutely hammered these past three years, is turning higher, led by Goldman Sachs (NYSE:GS), BlackRock (NYSE:BLK), Morgan Stanley (NYSE:MS), Credit Suisse (NYSE:CS) and others. At current levels, with quantitative stimulus in full bloom, the risk/reward favors getting involved. Fourth-quarter earnings will be released Feb. 14, and the ex-dividend date hasn’t been announced, but the prior ex-date was Nov. 9, so I think you’ll have a few days to capture the current dividend.
