I like to cast a wide net as an investor. That's why I hold more than 100 stocks in my portfolio. This strategy allows me to make smaller bets on higher-risk stocks that could be big winners. I steadily add to positions as my conviction grows.
My highest-conviction investment right now is Brookfield Asset Management(NYSE: BAM). Because of that, if I could only buy one stock, it would be Brookfield.
BAM 101
Brookfield Asset Management is a leading global alternative asset manager. It has over $750 billion of assets under management, putting it near global leader Blackstone(NYSE: BX), which has $951 billion in AUM. Brookfield focuses on the renewable power and transition, infrastructure, private equity, real estate, and credit sectors.
The company collects recurring asset management fees. It also earns a carried interest, which is its share of the profits from the funds it manages on behalf of investors as they achieve and exceed their return objectives.
Until recently, Brookfield Asset Management was a business unit embedded within Brookfield Corporation(NYSE: BN). However, that company split off 25% of its asset management business and distributed it to shareholders late last year. The company made that move to unlock the value it created by building one of the world's leading alternative asset managers. It also allows investors to directly benefit from the income and growth produced by the asset management business.
Three powerful value drivers
The legacy Brookfield was one of my largest holdings before the split. Because of that, I already have a sizable position in Brookfield Asset Management. However, I want to add to that position because I love the dividend, growth potential, and valuation. This trio of value drivers can empower Brookfield Asset Management to deliver market-crushing total returns over the next few years.
We'll start with valuation. Before Brookfield Corporation split off its asset manager, it believed the entity was worth $32 to $45 per share. It based that on a 25 to 35 times valuation multiple for its $2 billion of fee-related earnings, which is where rivals like Blackstone and KKR(NYSE: KKR) traded. With the stock currently trading at less than $30 a share, it's below the low end of Brookfield's estimated value range.
Meanwhile, Brookfield expects to grow its fee-related earnings by 15% to 20% annually for the next several years. It has already locked in that growth for at least the next few years based on the funds raised from investors in the recent past. It will start earning management fees on that capital as it deploys the money on behalf of investors. In addition, Brookfield Asset Management will begin earning carried interest on the funds it raised. It gets two-thirds of that income, with the other third going to Brookfield Corporation.
By 2027, Brookfield Asset Management expects to grow its annual fee-related earnings to $4.5 billion. On top of that, it expects to reap $1.5 billion of annualized net carried interest income. As a result, the company believes its shares will be worth $71 to $94 apiece by 2027. That implies they could deliver 2x to 3x returns over the next five years.
As an asset manager, Brookfield doesn't require much capital. Because of that, it plans to distribute 90% of its earnings to investors each year, primarily through dividends. The company recently set its dividend payment for 2023 at $0.32 per share each quarter. With shares recently trading at less than $30 apiece, Brookfield Asset Management offers a 4.3% dividend yield. While that's not quite as high as Blackstone's 6.5%-yielding payout, it's more than double the 1.8% dividend yield on the S&P 500. Meanwhile, the company expects to grow its payout with fee-related income, or at a 15% to 20% annual rate. That growing income stream will further add to Brookfield's total return in the coming years.
A high probability of earning high returns
Brookfield Asset Management expects to grow its recurring fee-related income at a high-teens rate for the next several years, with most of that growth already locked. That should enable it to expand its high-yielding dividend at a similar rate. Add in the fact that shares trade at an attractive value and Brookfield appears poised to produce market-smashing total returns in the coming years. That high probability of earning high returns is why it's my highest-conviction stock right now.
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Matthew DiLallo has positions in Blackstone, Brookfield Asset Management, Brookfield Corporation, and KKR and has the following options: short March 2023 $45 puts on KKR. The Motley Fool has positions in and recommends Blackstone, Brookfield Asset Management, Brookfield Corporation, and KKR. The Motley Fool recommends Brookfield. The Motley Fool has a disclosure policy.
