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A Renewed Hope for Federated

Posted on: August 20, 2008 - Email Article - Printable Version

Steve Murray

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Federated Investors [FII: 18.79, +0.34 (+1.84%)] have underperformed the broader market for some time now. They are down 21% YTD and 23% for the past 6 months. This is relatively better than the Financial Sector SPDR [XLF: 12.58, +0.13 (+1.04%)], which is down almost 30% YTD. This poor performance can be contributed to the broader financial sector, bond/debt markets, and margin contraction. Many asset managers have done poorly this year, but compared to other financial sector companies you could say they are holding up relatively well. Federated has had a great week so far, as they are up almost 5% on the week. This performance is likely to continue as investors and funds will flock back to Federated as their management has reaffirmed their financial strength.

On Tuesday, Federated announced that it will pay its first ever special dividend of $2.76 a share on September 15^th to shareholders of record on September 9^th. This news sent shares up 7% initially, but the stock settled up about 5% to $30.74. Management has decided that Federated’s strong financial position has allowed it to pay out a special dividend during a time when many other firms are in a “damage control” state. Investors will receive $3.00 per share as a combination of the special and regular dividends for the 3^rd quarter.

In addition to the special dividend announced, the board also announced that the board authorized the company to buy back as many as 5 million additional shares of its class B common stock. This buyback is in addition to an existing repurchase program approved by the board which has about 2.8 million shares remaining. The existing program will expire at the end of the fiscal year. As of July 23, Federated had about 100.1 million shares outstanding. These repurchase programs is great news for shareholders as they will inflate earnings per share numbers by over 7% for the over the span of 12-18 months.

Federated currently has about $135 million of cash that they are willing to use for the dividends and share repurchases. In addition they will use money from a new $140 million term loan agreement and a $200 million revolving credit facility. Thomas Donahue, the CFO of Federated stated: “We believe that the special dividend and the new share repurchase program will provide additional value to our shareholders and that the new term facility gives the company a more efficient capital structure.”

The news of the special dividend and new share repurchase program shocked many investors which sent shares up over 7% initially. Buckingham Research also maintained their “neutral” rating on Federated in light of the company’s announcement. A Buckingham analyst stated: “We find the timing of the special dividend curious given a) how weak the stock has been of late, with a more potent buyback perhaps sending a greater message to the investment community, in our view, and b) adding leverage in still difficult macro backdrop for a special dividend that arguably has a ‘one off’ impact adds an element of financial risk – though we recognize FII’s pro forma net debt to LTM EBITDA of approximate 0.5x is not particularly onerous. We do not believe the news has an impact on FII’s ability to craft further deals, but does marginally reduce the size of potential deals, all else equal.”

Either way you look at it, Federated’s management has sent a strong message to the investment community as if to almost say, “We don’t deserve to be down this much!” With their stock price down over 20% for the year and ratios at historical lows, Federated Investors may deserve a second look.

-Steve Murray

Disclosure: The mutual fund which the author is associated with is long FII.

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