The Wall Street Journal's article on June 28 by Min Zeng on A Bond-Investing Conundrum is interesting.  This article concentrates more on what the Federal Reserve will do with their balance sheet than on interest rates that affect the ordinary investor.  As an ordinary investor, I wondered are interest rates really going up or not?  

Take a look at the chart below that compares interest rates today with their 52 week low on 4 products:  U.S. Prime rate, Discount rate, 60 day 30 year Fannie Mae mortgage money and call money.   Each of these rates has significance for the ordinary investor. 

Call Money

Many investors borrow money from their broker using call money.  Call money must be paid on demand.  It can be be very useful to use leverage.  You can make bigger bets for bigger returns and yet, it can be risky as you better have the money to pay back the borrowed funds or the lender can liquidate anything in your account to be paid back.

Fannie Mae

Lenders use this rate to price their mortgages.  Most ordinary investors have a mortgage, not all but most and as this interest rate increases so do mortgage rates for you and me.

 

Discount Rate

Commercial banks and depository institutions borrow money from the Federal Reserve and this rate is what they pay.  It is the most volatile of the rates in this chart.   The discount rate affects ordinary investors less than perhaps Fannie Mae.  However, it will affect both the cost of you borrowing money as well as the amount you are paid on deposits by your local bank.

U.S. Prime rate

Providers of commercial and consumer loans use the U.S. prime rate as a basis and then add their profit.  When the U.S. prime rate goes up so does every debt product used by you and me.

Readers, interest rates are going up.  When we will be able to take advantage of that by moving income assets from stocks into bonds is still unknown but interest rates are going up.

M* MoneyMadam

Westwood Holding Group, WHG, 2017 M* MoneyMadam Dividend Machine

I have selected Westwood Holding Group, WHG, for inclusion in my 2017 M* MoneyMadam Dividend Machine Portfolio.

• Fiduciary Rule impacted WHG stock price and assets under management
• WHG stock price rebounded from $55.77 to $57.06 in last two weeks
• Stock has delivered 13.63% annual dividend growth over past 3 years
• Acquisitions have shored up WHG business
• WHG meets my 2017 Dividend Machine Fundamentals

Before I left on vacation, I targeted Westwood Holding Group, symbol WHG, for inclusion in my 2017 portfolio, however, I had not completed my review and waited until I returned to write up this story.   During that 2 weeks, the stock price moved from $55.77 to $57.06. 

History of Westwood Holdings

Started by Susan Byrne in 1983 to provide advisory services that could be trusted, this company has consistently grown on every level.  Named after the “Wizard of Westwood,” Coach John Wooden, Westwood Holdings uses Coach’s pyramid of success as a guide.   Employees receive a copy of Wooden’s book “Inch and Miles.”  

In July 2002, Westwood went public under the symbol WHG.  They are global asset managers, serving institutional investors as well as private wealth investors and they serve as financial intermediaries with $22.1 billion of assets under management.

Five Year Chart of WHG price stock history:  Source NASDAQ

 

Notice the significant stock price deterioration in 2016 when the fiduciary rule announcement affected all asset managers.

WHG an Active Manager

As institutional investors, they provide large amounts of money that can be used by companies to raise capital.  They do not accept deposits from individuals as a bank does.  For their private wealth customers, WHG delivers financial planning, portfolio management, and other aggregated financial services.  They are multi-licensed portfolio managers.  As financial intermediaries, they can provide factoring, leasing and insurance plans although WHG does not provide leasing and insurance.  WHG specifically provides mutual funds and MLP’s and other investment products.

While “active” management is out of favor today, WHG is an active manager. Wealthy people do not put their money in just SPY.   Wealth accumulation comes with complexity and it takes a team like WHG to work through all those externalities to make sense of significant wealth.   These services are not cheap.  WHG does not divulge their fees on their website. In their April 26, 2017 press release, WHG indicates they received performance-based fees of $0.4 million during the first quarter of 2017 alone.

M* Dividend Machine Fundamentals

I am an income investor and while I try not to chase yield, I expect my stock picks to deliver more income than I can get from a 10 year U.S. Treasury.  I expect my income to grow faster than inflation and I want a solid company that is not at risk of default due to a bad balance sheet or a change in some momentum catalyst.

The table below summarizes how WHG scores on the criteria I use.  Note that I don’t require covered call options for a stock to be part of my model portfolios, but with low dividend stocks I do like to have the call option potential.  WHG has a mid 4% yield and that is good enough to mitigate the call option hurdle.

Questionable Revenue and Earnings Growth

When I looked back to 2011 when WHG was a Dividend Machine, I notice that the stock price has increased nicely from $37.65 to $57.06.   Click here to review the 2011 post on WHG. The dividend has grown as expected from $1.40 to $2.48.  In 2015 WHG again met all my criteria for a Dividend Machine.  In that post WHG's price was $57.15 so no growth since then.  More significant is their EPS are less than they were in 2015.   Click here to review the 2015 post on WHG. This requires more inquiry.

2016 shows a distinct slowdown in growth and their internal documents tell us that resulted from a reduction in assets under management (aum) as well as reduced asset performance.  I looked more closely and the table below shows their most recent report regarding revenues, assets under management and net income.   

From Westwood 10-K filing Feb 2013. 

“Our business is dependent on investment advisory, sub advisory and trust agreements that are subject to termination or non-renewal. As a result, we could lose any of our clients on very short notice.

Dividend Quality

I looked back at how the dividend held up during the significant financial crisis of 2009.  After increasing the quarterly dividend from $.25 to $.30 in February 2008, they held that dividend steady until the next increase.  In October 2009, the quarterly dividend increased from $.30 to $.33.   Considering how disruptive this period was, I find it encouraging that WHG was able to maintain their dividend.

WHG is not sitting on their hands doing nothing.  They have acquired other entities to shore up their business.  These acquisitions include:  McCarthy Group Advisers in 2010, in 2015 Woodway Financial Advisors in Houston added to their private wealth platform, and in 2017 they bought a significant part of Hudson Pacific Properties.

I feel better about their recent performance but as an income investor I concentrate on that dividend.  Their payout ratio is pretty high and I turned to “Dividend Score.com” to see what their analysis revealed.  The charts below present their analysis. 

Using June, 2017 data:

 

In summary, WHG is a success story that John Wooden would be proud of.   Taking a position in WHG should provide a good dividend stream and dividend growth.   Stock price growth may be stagnant while we work through the fiduciary rule, but WHG continues to grow their business and I am hoping it will fit nicely in the 2017 Dividend Machine Portfolio.

M* MoneyMadam

Disclosure:  Long WHG