The Magellan Financial Group Ltd (ASX: MFG) share price is in focus today after releasing its FY21 result.
Magellan’s FY21 result
The fund manager reported that its statutory net profit after tax (NPAT) fell by 33% to $265.2 million.
A key part of the statutory profit decline came from costs relating to strategic initiatives of $154.1 million, which primarily related to the restructuring of its global shares retail funds that completed in December 2020 and the associated partnership offer and bonus option issue that completed in March 2021. These moves are aimed to increase long-term profitability and the ‘stickyness’ of its funds under management (FUM).
Profit before tax and performance fees of the funds management business grew 10% to $526.6 million, with the average FUM increasing 9% to $103.7 million. This shows that Magellan’s core underlying profitability continues to rise. The cost to income ratio of the funds management business continues to improve.
However, adjusted net profit after tax fell 6% to $412.7 million. This includes the after-tax losses incurred by the investments of ‘Magellan Capital Partners’, which were $41.8 million. The losses were incurred to grow the businesses as they invest and build operations – those losses are non-cash items to Magellan.
Magellan (Capital Partners) made three external investments during the year, including new investment bank Barrenjoey and Mexican fast food business Guzman y Gomez. It spent $156 million on a 40% economic interest (and 5% voting interest) in Barrenjoey and $103 million for a 12% stake in GYG.
The fund manager believes that these investments have the potential to add to its intellectual capital, provide meaningful optionality and diversification and, importantly, generate “substantial” shareholder value over time.
Adjusted net profit after tax and before associates/investments grew 4% to $454.4 million.
Magellan dividend
Magellan’s FY21 dividend was 2% lower to 211.2 cents per share.
However, part of Magellan’s dividend comes from performance fees. FY21 crystallised performance fees before tax was $30.1 million for the year, down from $81 million in FY20. Performance fees can vary significantly.
The performance fee dividend to shareholders fell 62% to 11.5 cents.
However, the total ordinary interim and final dividends for the year increased 8.2% to 199.7 cents per share.
Summary thoughts on the Magellan share price and dividend
I think Magellan looks like a compelling business. Profitability seems on track to increase with the FY21 average FUM being $103.7 billion and the closing FUM at June 2021 being $113.7 billion. July 2021 FUM was even higher at $117 billion.
As long as FUM doesn’t fall, the funds management business profit (excluding performance fees) is likely to rise again. This could also contribute to a growing ordinary dividend. I’m also quite excited by the prospect of the Magellan Capital Partners investments.
It looks like it could be one of the solid ASX dividend shares, but there are other ones I’ve also go my eyes on.
