Invesco (IVZ) is best known as the distributor of the Invesco QQQ ETF (QQQ). While QQQ is a core holding for most indexers, as well as, long-term growth investors, the parent company is a very solid pick for dividend growth investors. It is one of the core holdings at my investment firm since August and was recommended to members of Margin of Safety Investing recently (disclosure).
I believe that the recent upgrade by Deutsche Bank (DB) will be the first in a series of upgrades as analysts pile on the positive business developments at Invesco. I rate IVZ a buy at current levels and on any near-term pullbacks.
A Quick SWOT Report For Invesco
David Zanoni, another top-ranked contributor to Margin of Safety Investing, did a more complete “Strengths, Weaknesses, Opportunities, Threats” analysis that I am summarizing and adding to here. As a part of our investment process, we do a SWOT report as the jumping in point for all of our company research.
First and foremost among Invesco’s strengths is its size as an asset manager and focus of being a leader in the growing ETF market. It’s scale allows it to create economies of scale in a price competitive business.
The company’s AUM and top-line growth, largely fueled by recent acquisitions, is giving it free cash flow to pay down debt, increase dividends and have a robust share buyback program. There is no short-term, nor likely intermediate term threat, to the dividend as far as we can see.
Ultimately, as you’ll see below in the investment thesis, the management of Invesco is exceptional. They have focused the company on being on the right side of all the big secular trends in finance, fintech, investing and demographics.
A often cited weakness is the recently taken on debt from acquisitions. Though the company boasts solid financials, it currently has higher expenses due to the acquisitions which are impacting margins. It is incumbent on the company to continue to pare expenses.
That yields a large opportunity for Invesco and investors. The Oppenheimer acquisition brought on billions in mutual fund assets that are being converted to the ETF side. As managers are let go and other operational expenses are cut, that gives Invesco to improve margins again and catch the attention of slower moving analysts.
The company also has a strong opportunity in Europe where it already has a foothold. Their purchases of Intelliflo in the U.K. and Source in the EU give it access to the advisor and retail direct markets. They also have a position in the fast growth Asian-Pacific region, as well as, Canada.
As the ETF market expands globally, Invesco, with QQQ holding $79 billion, the S&P 500 Equal Weight ETF (RSP) with $16 billion, S&P 500 Low Volatility ETF (SPLV) holding $13 billion and various other low volatility and factor based funds, is primed to continue to grow.
The ever present threat is competition. Should QQQ go out of favor for an extended period or their other ETFs fail to continue to grow the company could be forced into a holding pattern for a long period of time.
What Others Are Missing About Invesco
Angst about recent acquisitions and the short-term costs have wrongfully scared superficial investors away. The stock dove on technical factors and recently, as shown above, consolidated before starting its recent rise from a triple bottom.
The cost synergies of the Oppenheimer deal are just starting to become apparent. The company just announced that they have “achieved annualized expense synergies of $501 million for the integrated business, ahead of schedule and $26 million above our original target.”
I believe the synergies originally stated will continue to manifest. Not only are personnel cuts from the active side occuring, but ETF mergers have offered consolidated expenses as well. The oft ignored costs of compliance on the mutual fund side are plunging. I would not be surprised to see the mutual fund side of the business become a handful of managed ETFs, further enhancing costs and margins, but making their ETF offerings more attractive.
As far as I can see, the international side of the business is not being valued at all by investors or analysts. This is a dramatic mistake. There is a huge global hunger for U.S. based technology and other “new economy” investments. The QQQ ETF or clones, are likely to drive massive business to Invesco in coming years. I expect to see European growth kick into overdrive now that new EU regulatory hurdles are being overcome. Asian growth should continue for a long time.
In addition, Millennial investors, according to various studies, including by CB Insights, as well as, from basic observation by me as an advisor, make it clear that technology and “new economy” type investments are the future. Funds like the Invesco Solar ETF (TAN) which is the undisputed asset leader in that space have a bright future.
Bottom Line For Dividend Growth Investors
There are not a lot of ways to take part in the massive “new economy” secular trends now going on and collect an outsize dividend. Invesco is one that checks a lot of boxes. Invesco is a leader in:
- the growing ETF space.
- tech investing with the wildly popular QQQ ETF.
- retiree investing with the very popular S&P 500 Equal Weight and Low Volatility ETFs.
- sustainable investing with TAN and several other market leading ETFs.
- factor based investing which is growing in popularity.
- emerging markets investing through Guggenheim and Oppenheimer acquisitions.
With a dividend that is just a shade under 7% now with the recent move up in share price, Invesco can offer a double in just over 10 years even without any share price appreciation. As the company increases the dividend and reduces the share count, the stock will likely rise at least in line with those items.
Once the stock gets the attention of a larger group of dividend growth investors which will drive multiple expansion from the current forward P/E of 7.1 and P/B of .9, I believe IVZ will push over $30 per share within several years.
I rate Invesco a buy for both dividend growth investors and low volatility dividend investors.
Disclosure: I am/we are long IVZ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I own a Registered Investment Advisor, but publish separately from that entity for self-directed investors. See relevant terms and disclaimers at the website of Bluemound Asset Management, LLC. Any information, opinions, research or thoughts presented are not specific advice as I do not have full knowledge of your circumstances. All investors ought to take special care to consider risk, as all investments carry the potential for loss. Consulting an investment advisor might be in your best interest before proceeding on any trade or investment.
