Elevator Pitch
I rate Raymond James Financial (NYSE:RJF) as a Buy. The focus of my previous write-up published on April 25, 2024 was the review of Raymond James Financial’s Q2 FY 2024 (YE September 30, 2024) financial results.
My latest update touches on the takeaways from RJF’s recent investor events and previews the company’s third quarter results. I have a favorable opinion of Raymond James Financial’s future capital allocation, taking into account the read-throughs from the company’s commentary and disclosures. I also expect RJF to report a good set of results for Q3 FY 2024. Hence, I have left my existing Buy rating for Raymond James Financial unchanged.
Key Investor Event Takeaways Relating To Capital Allocation
Raymond James Financial was recently involved in two key investor events which are worthy of attention. RJF hosted its 2024 Investor Day on May 23 this year, and subsequently took part in Morgan Stanley’s (MS) US Financials, Payments & CRE Conference on June 10.
A key theme running through these two investor events is the substantial amount of excess capital that Raymond James Financial could potentially allocate to M&A and dividends.
In its Investor Day presentation slides, RJF disclosed that its “Tier 1 leverage ratio” as of end-March 2024 is 12.3% which is +230 basis points higher than the company’s internal target of 10%. Raymond James Financial highlighted at its late-May Investor Day that the difference between its actual Tier 1 leverage ratio and its targeted Tier 1 leverage ratio translates into “$2 billion of excess capital.” At the Morgan Stanley investment conference last month, RJF emphasized that it is “committed to getting it (Tier 1 leverage ratio) down to the 10% target.”
In other words, Raymond James Financial has significant excess capital and it has the intention to utilize a meaningful proportion of its capital to get closer to the Tier 1 leverage ratio goal of 10%.
I am impressed with RJF’s M&A approach which is focused on bite-sized deals which are less risky than larger ones, and mature markets where organic growth opportunities are more limited. Having the right M&A approach could boost Raymond James Financial’s inorganic growth prospects in the form of value-accretive acquisitions.
Raymond James Financial noted at the June 2024 MS investor event that the company’s inorganic growth strategy places a strong emphasis on “niche acquisitions” and “recruiting transactions”, as opposed to “large-scale acquisitions.” The company also mentioned at the 2024 Investor Day that “we want to grow (inorganically) in both Canada and here (North America)where we have mature platforms.”
Separately, there is room for RJF to raise the company’s dividend payout ratio.
Raymond James Financial’s official shareholder capital return policy is to distribute between 20% and 30% of its earnings as dividends to its shareholders. RJF’s actual FY 2023 and 1H FY 2024 dividend payout ratios were 20% and 19%, respectively as per S&P Capital IQ data.
At its Investor Day on May 23, 2024, RJF acknowledged that its recent dividend payouts were at the “very low end of that (dividend payout policy) range.” But Raymond James Financial also highlighted that “we look at our dividends typically once a year in the November, December board meeting” where the “Board will make a decision for the dividend for the following year.”
RJF’s consensus FY 2025 dividend yield is 1.6% based on an implied 19% dividend payout ratio as per S&P Capital IQ data. Assuming that Raymond James Financial’s dividend payout ratio for FY 2025 goes up to 30% (upper end of its policy payout range), the stock’s potential FY 2025 dividend yield could become more attractive at 2.5% based on my calculations.
Q3 FY 2024 Financial Results Preview
July 24, 2024 is the date for RJF’s Q3 FY 2024 (April 1, 2024 to June 30, 2024) financial results announcement. The market has a favorable opinion of Raymond James Financial’s expected third quarter performance, and I think that the company’s actual financial numbers will meet or exceed Wall Street’s consensus estimates.
The sell side anticipates that Raymond James Financial’s revenue growth will accelerate from +8.1% YoY in Q1 FY 2024 and +8.5% YoY in Q2 FY 2024 to +11.6% YoY for Q3 FY 2024. The analysts also project that RJF will register a normalized EPS expansion of +26.7% YoY in the third quarter of the current fiscal year, which will be better than its actual Q2 FY 2024 bottom line increase of +13.8%.
There are key indicators suggesting that RJF is likely to perform as well as, if not better than, what the sell-side analysts have predicted.
The latest operating data disclosures have positive read-throughs for Raymond James Financial’s Q3 FY 2024 results. RJF’s client assets under administration increased strongly by +13% YoY and +18% YoY in April 2024 and May 2024, respectively. Earlier, RJF highlighted at its Q2 FY 2024 earnings briefing in late April that a +7% growth in Private Client Group segment’s fee-based assets and a +5% increase in the Asset Management segment’s financial assets under management for Q2 “should provide a tailwind to revenues” in the third quarter.
Separately, RJF stressed in its June 18, 2024 8-K filing that “the investment banking pipeline is healthy.” Also, a July 7, 2024 Financial Times article cited consensus data from Bloomberg implying an expected +30% rise in Q2 2024 (calendar year) investment banking revenue for the key Wall Street banking firms.
In a nutshell, Raymond James Financial is expected to have recorded significantly higher asset management fees and investment banking revenue for the third quarter of fiscal 2024. As such, I am confident that RJF’s actual Q3 FY 2024 results will be in line or above expectations.
Key Risks
The major risks for RJF relate to the company’s future capital allocation and financial performance.
Investors will likely view value-destructive M&A deals or a failure to increase the company’s dividend payout ratio in a negative light.
On the other hand, a Q3 FY 2024 results miss driven by factors like a slower-than-expected recovery in investment banking revenues could possibly lead to a pullback in RJF’s share price.
Closing Thoughts
I stick to my existing Buy rating for RJF after previewing the company’s Q3 performance and assessing its disclosures at the latest investor events.
Also, I previously noted in my April 25, 2024 article that “the stock’s valuations are attractive, as per the comparison of its low-teens earnings multiple with its high-teens ROE.” This argument is still valid, considering the company’s consensus FY 2024 ROE projection of 18.6% and the stock’s consensus next twelve months’ normalized P/E metric of 12.2 times as per S&P Capital IQ data.
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