Morgan Stanley: Serial Dividend Raiser Winning With Investment Banking
Contributor since 2012 / 41122 Followers
Summary:
- Morgan Stanley reported strong Q1 earnings with net revenues of $15.1 billion, beating expectations by $710 million.
- Investment banking and trading activity drive the bank’s performance, with the Institutional Securities segment seeing a bump in revenue.
- The bank’s efficiency ratio improved slightly to 71%, and it continues to pay a dividend of $0.85 per share.
- Do not forget the massive repurchase program.
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Morgan Stanley (NYSE:MS) is a bank stock that we have traded a number of times. Here in 2024, we are seeing banks make adjustments as they prepare for higher for longer interest rates, and the likelihood of fewer rate cuts in 2024. Now, Morgan Stanley is a bank, but is not exactly focused on traditional banking. It is more of an investment bank and wealth management firm. The latter has recently been flagged for probing by the Federal Government, for possibly not complying with KYC (Know Your Customer) laws.
Essentially, banks and other financial firms are required to verify their customers’ identities and where their funds come from. It is a headline grabber, but likely not one to put a major dent in operations. With markets still near all-time highs despite the selloff over the last two weeks, investment banking and trading income have led the bank to put out a solid Q1 earnings report. In this column, we check back in with our favorite investment bank.
Headline numbers strong
We thought the bar was low for bank earnings estimates this quarter, and thus far banks are largely beating estimates. With the market working so well in Q1, we expected investment banking would continue to perform well, while traditional banking continues to see margin pressure as the spread on what is paid out to depositors versus what is brought in on loans has been tightening the last 6 quarters. Investment banking and trading tends to thrive in a volatile market that is moving higher, in our opinion. Q1 saw a number of days of selling, but by and large was quite positive.
Moving to performance, Morgan Stanley reported net revenues of $15.1 billion in Q1. This was a strong outperformance, which we simply had not expected, although other large bank earnings hinted at a beat being likely. Revenues were actually up from last year, we thought they would be about flat. In fact, this was a 4% increase from last year’s quarter. While flat earnings were expected on our end and generally by analysts, we were looking for $14.3-$14.5 billion. But these results beat analysts’ consensus by $710 million.
The top-line beat was a driver of strength, while expenses were well managed. Compensation expenses were up, though non-compensation expenses fell slightly, and there was a small provision for losses credit of $6 million versus a provision for loss of $234 million a year ago. The margins were strong. Consolidated pre-tax margins were 29%. The top-line rising with respectable margins led to a jump in net income to $3.4 billion, or $2.02 per share, compared with net income of $3.0 billion, or $1.70 per share, last year. This was a beat by $0.36. Solid performance.
Segment performance
Morgan Stanley is an investment-style bank, and trading activity remains a major driver of Morgan Stanley’s results. The bank tends to do well when there is volatility but a rising market, and numerous people trading. Let’s discuss key segment highlights to be aware of. The “Institutional Securities” segment saw a bump in revenue from last year. The reported revenues of $7.0 billion were up $0.22 billion from last year. There were lower advisory revenues as there has been less merger and acquisition activity. Underwriting was strong, as was equity. Fixed income dipped $90 million, but investment banking was up $200 million.
Over in “Investment Management,” revenues were up nearly $100 million from a year ago. They came in at $1.38 billion, versus $1.29 billion a year ago. This was driven by higher asset management and related fees. There were also higher assets under management and, of course, the market was strong in Q1. Revenues there comprise almost all of this segment, as revenues were $1.35 billion. Performance-based revenues were also down $10 million to $31 million. Total expenses were up just $10 million, so there was a strong margin here.
Over in the “Wealth Management” side of the business, which is being probed as we mentioned in the open, there was a $330 million increase in revenue. The segment reported net revenues for the current quarter of $6.88 billion, compared with $6.55 billion from a year ago. Asset management revenue surged nearly $450 million, reflecting higher asset levels and fees. Transactional revenue also increased 9% to $1.03 billion. However, net interest income dipped as margins have narrowed across the industry by and large. This has to do with changes in the deposit mix, the rates on deposits, and the rates on lending.
As we look ahead, we expect this pattern to continue, barring a market meltdown driven by fear of higher for longer rates. That said, banks are prepared for higher for longer.
Efficiency ratio
When analyzing banks, the efficiency ratio is a metric we follow. Highly efficient banks have a ratio under 60%. However, ratios are higher with traditional banking by and large. Morgan Stanley’s efficiency ratio, in part because of their operations as more of an investment bank, has consistently had efficiency ratios above 70%. That said, the bank saw a small improvement in efficiency. Here in Q1, it came in at 71%, versus 72%. Overall, this is around its historical average.
Dividend pays nicely
The bank has continued to raise its dividend. Now the dividend is up to $0.85 per share each quarter. With the present share price, the forward yield is nearly 4%. While this is not super high-yield by any means, you are paid to wait for the next run higher. But this bank stock should be considered by dividend growth investors for long-term investment. Shares are attractive here in the $80s, but we would love another chance to buy in the $70’s. We also should point out the bank repurchased $1.0 billion of its outstanding common stock during the quarter as part of its repurchase program, further boosting shareholder value and improving EPS.
Take home
Morgan Stanley’s earnings were better than expected. This year, 2024, could be interesting for banks with a higher for longer narrative now dominating the channels, when at the start of Q1 everyone was betting on a March versus June cut. We guided our members in the spring of 2023, over a year ago, the first cut would not come until H2 2024. That looks plausible now, but it could be not until the end of the year data dependent.
So long as the market relatively holds up, and of course, Morgan Stanley’s investment banking and wealth management segments can weather a small correction, we continue to see a good year on tap. Take advantage of weakness and consider an investment into MS for long-term appreciation and dividend growth.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
Analyst’s Disclosure: I/we have a beneficial long position in the shares of MS either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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