Is Magellan signalling a lurch from yield play to growth stock?

Any notion that Magellan Financial Group (ASX: MFG) is morphing from a high-growth funds management company into a low-growth dividend yield stock has been poo poo’d by the market with the share price up 18.18% following the fund manager’s pot pourri of half year revelations this morning.

But the market may have been so chuffed with today’s announced dividend increase that it was simply willing to turn a blind eye to an otherwise mixed bag of results, and any rhetoric that may take time to un-pack.

While Magellan’s half yearly numbers were relatively interesting - statutory net profit increased 24% to $251.6m – what captured the market’s imagination was the new road map embedded within the morning’s underlying commentary.

Annus horribilis 2021

The annus horribilis that was 2021, included a myriad of issues for the chairman Hamish Douglass personally, including marital issues and a leave of absence on medical grounds.

Equally baffling was the mysterious departure of former CEO Brett Cairns. Magellan is yet to appoint a permanent CEO, but interim CEO Kirsten Morton has shown a brave face to the market, noting the company is in a "robust" financial position.

"We are focused on our core funds management business and delivering upon our investment objectives for our clients."

Then there was the withdrawal of St James's Place mandate to the tune of $23bn in FUM, following a period of underperformance.

Result highlights

Before looking at what’s in store for the fund manager, here are half year highlights:

• $29bn in fund outflows

• Interim dividend up 13% to 110.1 cents a share, suggesting the full-year payout will be about $2.30

• 13% increase in management and services fees, in line with 12% growth in average FUM

• Performance fees of $11.5m

• Other revenue and income driven by distribution income of $8.6m

• Realised capital gains of $8.1m and net FX gain of $2.1m

• Adjusted net profit after tax up 16%

• Adjusted diluted EPS up 15% to 134.4cps, in line with growth in adjusted net profit

• 90 to 95% dividend payout policy remains intact

New capital management strategy

Within what is effectively a strategy U-turn, Magellan plans to put a freeze on further investments outside of its dominant funds management business.

The net effect is that the backer of investment bank Barrenjoey (40% owned by Magellan) - and external businesses like clearing house Finclear, and retail food franchise Guzman y Gomez - will finesse its capital management strategy.

The fund manager has made it clear there are no plans to make further investments via Magellan Capital Partners, which by default relegates the company to fund manager with precious little else going on.

While Magellan is contemplating an on-market share buy-back, the company has confirmed a one-for-eight issue of options to shareholders, exercisable at $35, plus an award of 10m unlisted options to staff at the same strike price.

Yield play to growth stock

Lurking within the tea leaves embedded within these numbers – is an assumption that the stock’s share price can deliver 18% annually over the next few years.

Magellan can probably hold into its high yield-play moniker – with a yield at current prices of about 8.5% - given that retaining a minimum 85% of FUM shouldn’t be challenging.

However, one-for-eight issue of options to shareholders, exercisable at $35, suggests the company is now eyeballing a growth narrative going forward.

Commenting on this new strategy, stand-in chairman Hamish McLennan reiterated that “initiatives and proposals are in line with our aim to deliver capital efficiency, solid dividends and attractive returns for shareholders.”

Investors should note that any unforeseen deterioration in FUM could have a corresponding impact on future dividends, especially as the days of commanding high-performance fees – for outperforming their benchmarks – appear to be long gone.