Macquarie Group

While I miss the cream desserts from Macquarie Group’s boom-time annual meetings, shareholders at yesterday’s annual meeting were craving the higher profits and dividends. As usual chief executive Nicholas Moore refused to specify what an acceptable return on equity would be through the cycle, saying only that the market-facing businesses will remain as part of Macquarie despite their current poor performance. Return on equity from the remaining businesses, such as funds management and corporate and asset finance, remains very healthy despite tepid growth.

Moore has been cutting costs and could easily increase return on equity by indiscriminately selling poor performing businesses, laying off thousands more staff or increasing leverage. But such maneuvers on a large scale would seriously damage the business and we prefer balance sheets that can withstand some nasty surprises. Macquarie should easily comply with new regulatory capital and liquidity requirements, and Moore said the company could function for one year without access to capital markets.

While the company expects an improved performance in 2013 (the company has a 31 March year end) subject to financial markets, substantial improvement won’t come until consumers and companies regain confidence in the global economy, which could take many years without some real political leadership to deal with bad debts in the financial system. By then Macquarie should be paying tax in Australia after exhausting its pool of losses currently being used to offset its current taxes and dividend franking should increase, perhaps to 30%-40% in line with Australia's contribution to the company's total profit. 

At a 20% discount to net tangible assets today’s buyer doesn’t need a return to boom time conditions to produce a satisfactory return. We’ll publish a full review following reporting season, but for a thorough analysis of the company see our three part series Macquarie: Inside a Strong Buy from 12 Oct 11 (Buy – $24.89). The share price has fallen slightly since 19 July 12 (Long Term Buy – $24.74) and once again we’re upgrading to BUY.

Note: The model Growth portfolio owns Macquarie Group shares.