This month, I take a look at a stock that I have never considered before: Lazard Ltd. (LAZ), which is the modern successor to Lazard Freres, an old white-shoe investment bank.
The original Lazard was founded in 1848 as a dry goods merchant in New Orleans. Within 2 years, the firm entered the banking business. The modern Lazard went public in 2005.
Here is how Lazard describes itself in a nutshell:
Lazard is the world’s leading independent financial advisory and asset management firm. We serve clients with thoughtful advice and effective solutions to strategic and financial matters.
[Source: Lazard Ltd Reports First-Quarter 2017 Results]
Lazard’s Dividend Characteristics
This dividend resume is good if not outstanding.
The best parts about it are:
• Yield of 3.5%.
• 5-year dividend growth rate of just under 20% per year.
• Dividend Safety Score of 67 from Simply Safe Dividends. This grade means that they rate the dividend as safe and unlikely to be cut.
The only flag is the declining rate of dividend growth over the past few years. This table shows the annual rate of LAZ’s dividend growth since its current streak of 10 years started.
2017’s increase was 7.9% in May. As you can see, the annual percentage increase has declined each year since 2012.
That said, the increases have continued, extending Lazard’s annual streak to 10 years.
Interestingly, Lazard did not cut its dividend during the Great Recession as so many banks did. It just froze it for a year in 2007 and resumed increases in 2008.
Here is a graph of Lazard’s dividends over the past 12 years.
Note that the annual step increases are punctuated by spikes. These are special dividends that have been paid in 2012, 2015, 2016, and 2017. Special dividends are not included in the calculation of increase streaks or yield, because they are unpredictable and outside the normal realm of incremental increases.
Obviously, however, to the investor, special dividends are real money when declared and received. Here is how the income from Lazard has looked to an investor with the special dividends added to the regular dividends:
[Source of all gold-bar graphs: Simply Safe Dividends]
Lazard has kept its cash flow payout ratio well under control.
Lazard has stated dividend growth as a strategic objective. This slide is from their most recent investor presentation.
Lazard’s Business Model and Company Quality
Lazard has from its earliest days been international in scope. It currently has offices in 43 cities across 27 countries. That said, it is small compared to major banks, being only about 5% the size of Goldman-Sachs (GS) for example.
Lazard has 2 main lines of business: financial advisory services and asset management.
Lazard’s Financial Advisory business offers corporate, partnership, government, and individual clients across the globe a wide array of complex financial advisory services. Examples include mergers and acquisitions (M&A), restructurings, strategic counselling, capital raising, and transactions that typically are of significant strategic and financial importance to the clients.
The Financial Advisory business is episodic.
There are no long-term contracted sources of revenue.
Each engagement is separately negotiated and awarded.
Lazard gains new clients each year through its business development initiatives, by recruiting additional senior investment banking professionals who bring along client relationships, and through referrals from third parties with whom Lazard has relationships.
Lazard would seem to have a competitive advantage in international financial advisory activities, with a wide international presence and an extensive global web of relationships. Here is how its revenue is split geographically.
Lazard’s advisory businesses are sensitive to economic cycles. An extended period of low economic growth is always a risk. M&A activity craters during such periods.
Lazard’s second business concentration is Asset Management. The firm offers a broad range of global investment solutions and management services in equity and fixed income strategies, alternative investments, and private equity funds. Customers include corporations, public funds, sovereign entities, endowments, foundations, labor funds, and private clients.
Lazard does not offer passive index solutions, rather focusing on fundamental security selection.
Lazard has about $198 billion under management. As of the end of 2016, about 88% of that was managed on behalf of institutional clients (corporations, labor unions, pension funds, and the like), while approximately 12% was managed on behalf of individual clients, which are principally family offices and high-net-worth individuals.
Morningstar awards Lazard a Narrow Moat rating. It states that the moat rating is due to Lazard’s reputation, geographic reach, and relative diversification of its asset-management business.
The following slide depicts how Lazard has grown since its IPO in 2005.
There is no S&P credit rating for Lazard. When the firm issued $400 million in senior unsecured notes in 2015, S&P rated them BBB+, which is an investment-grade rating.
Lazard’s Financials
ROE (return on equity) is a standard measure of operating efficiency. It is one metric used to judge company efficiency, indicating how effectively the company uses shareholders’ capital to generate profits.
Lazard’s ROE is 36%, which is better than average. The average ROE for all Dividend Champions, Contenders, and Challengers is 15%. As you can see from this chart, Lazard’s ROE tends to hop around from year to year, but it is usually well above 15%.
Lazard is usually quite profitable. Note in the following graph how its profit turned negative in 2009 during the Great Recession. As noted earlier, recessions cause M&A and other financial advisory markets to collapse. But as we also saw earlier, Lazard only froze and did not cut its regular quarterly dividend during that recession.
Forward estimates for earnings growth come from analysts covering the company. The expected growth rate is 6% per year, which is under the average of 9% for all Dividend Champions, Contenders, and Challengers.
Lazard’s free cash flow is healthy and invariably positive despite year-to-year variations.
Lazard’s Stock Valuation
Lazard’s price since going public in 2005 has been erratic to say the least. Despite its recent rise, however, the stock is still well valued.
My 4-step process for valuing companies is described in Dividend Growth Investing Lesson 11: Valuation.
Step 1: FASTGraphs Default. The first step is to compare the stock’s current price to FASTGraphs’ basic or default estimate of its fair value.
That basic estimate is based on a standard reference price-to-earnings (P/E) ratio of 15, which is shown by the orange line on the following chart. The black line shows LAZ’s actual price.
Lazard’s price lies slightly below the orange fair-value reference line.
In percent, LAZ’s price is 3% below its fair value estimate according to this first valuation step. I calculate that number by dividing the stock’s actual P/E ratio (14.5) by the ratio of 15 that was used to draw the orange line.
I consider anything within 10% in either direction to indicate fair value, so I would call Lazard fairly valued using this first step.
This method suggests a fair price of $49 compared to the stock’s current price of about $47 per share.
Step 2: FASTGraphs Normalized. The second valuation step is to compare LAZ’s price to its own long-term average P/E ratio. This gives us a different perspective based on the stock’s own long-term market valuation instead of the market’s valuation as a whole.
Here, the fair value line is in dark blue. We can see from the dark blue box on the right that LAZ’s long-term average P/E has been 17.4. In other words, historically the market has valued Lazard more than the average stock (at 15).
Using this method, Lazard is 17% undervalued. This method suggests a fair price of $57.
Step 3: Morningstar Star Rating. Morningstar uses a discounted cash flow (DCF) process for valuation. Their approach is comprehensive and detailed. Many investors consider DCF to be the best method of assessing stock valuations.
In a nutshell, Morningstar makes a projection of all the company’s future profits. The sum of all those profits is discounted back to the present to reflect the time value of money. The resulting net present value of all future earnings is considered to be the fair price for the stock today.
On Morningstar’s 5-star system, Lazard gets 4 stars, meaning that they think the company is undervalued. They calculate a fair price of $54.
Step 4: Current Yield vs. Historical Yield.
Last, we compare the stock’s current yield to its historical yield. This is an indirect way of calculating fair value, based on the idea that if a stock’s yield is higher than normal, it may indicate that its price is undervalued (and vice-versa).
According to Morningstar, Lazard’s 5-year average yield has been 2.8%. The current yield of 3.5% is 25% above that.
When I use this 4th method, I cut off the difference at 20%, because of the indirectness of the approach. Using 20%, I calculate a fair price of $59.
Valuation Summary:
Miscellaneous Factors
Beta measures a stock’s price volatility relative to the S&P 500. I like to own stocks with low volatility, because they present fewer occasions to react emotionally to price changes, especially price drops that can induce a sense of fear.
As we saw earlier, Lazard is a high volatility stock. That is reflected in its beta, which at 1.8 means that the stock has been nearly twice as volatile as the market as a whole. This is not a positive factor for most investors.
I normally determine analysts’ recommendations from data collected by S&P Capital IQ. Their most recent report on Lazard does not have that information. However, similar data is collected by Zacks and reported on the NASDAQ site.
This graph shows the opinions of 6 analysts. On a scale of 1 to 5, their average rating is 3.7, which equates to just under “Buy.” I consider this a weak but interesting indicator.
Lazard’s share count has been flat recently. I normally like to see share count declining (because the dividend pool is spread over fewer shares), but flat is OK. We saw earlier that Lazard is seeking to hold its share count flat in light of its share-based compensation to many employees.
Bottom Line
Here are Lazard’s positives:
• Attractive yield of 3.5%.
• 10-year streak of increasing dividends. Froze but did not cut dividend for one year during the Great recession. Stated intention to raise dividend regularly.
• Occasional special dividends.
• Reasonable cashflow payout ratio; dividend considered safe by Simply Safe Dividends.
• Narrow-moat business model.
• Decent financials. Earnings growth varies from year to year. Consistent cash flow generator.
• Stock is undervalued.
And here are the negatives:
• Declining rate of dividend growth per year, although that has been offset by special dividends in several years including 2017.
• Extremely high beta (price volatility).
As always, this is not a recommendation to buy, hold, or sell Lazard. Perform your own due diligence. And always be sure to match your stock picks to your financial goals.
— Dave Van Knapp
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