Macquarie Group
Recommendation
Macquarie Group’s share price has increased 3% after announcing a 9% drop in operating income to $7.0bn for the year ending 31 March. It would have fallen 13% without the $295m special distribution received from Sydney Airport.
Net profit fell 24% to $730m, earnings per share fell 26% to $2.10 and return on equity fell to a record low of 6.8%. That was despite profits increasing from $305m in the first half to $425m in the second half as markets shook off fears of a European banking collapse. An unfranked dividend of 75 cents was declared (ex date 7 May), bringing the annual total to $1.40. That puts Macquarie on a 4.8% unfranked dividend yield.
The annuity businesses performed relatively well, with the collective pre-tax profit of the funds management, banking and financial services and corporate lending divisions increasing 18% to $1.6bn.
The Fixed Income, Currencies and Commodities division was the chief beneficiary of the recovery in global markets, but pre-tax profit still fell slightly to $539m. In a sign of the times, Macquarie Securities produced a $194m loss after a profit of $184m in 2011, down from a record profit of $1.2bn in 2008.
Management has finally cut 1,354 staff (mostly from Macquarie Securities and head office), or 9% of Macquarie’s global workforce. The company also received approval to buy back up to $500m worth of shares (down from an original forecast of $800m). Even after the buyback, the balance sheet will be safer than it was prior to the GFC. Higher capital and liquidity requirements will continue to weigh down return on equity, though.
These measures won’t return profits to boom-time levels any time soon, but Macquarie’s annuity-style businesses should help support dividends while we wait for corporate activity to increase. The share price is flat since Macquarie versus Goldman Sachs from 28 Mar 12 (Hold – $29.55), and we’re sticking with HOLD.
Note: The model Growth portfolio owns Macquarie Group shares.