This week’s mailbag included a question about investing in an investment company. Specifically, about a position in Fortress Investment Group (NYSE:FIG).
I thought the topic was worth exploring for two reasons. Firstly, an analysis of Fortress will help explain broader challenges for some smaller-profile investment managers like Och-Ziff Capital Management Group (NYSE:OZM) and Apollo Global Management (NYSE:APO), to name a few. Secondly, FIG dividends help illustrate the volatile nature of distributions in the investment management space — and serve as a cautionary tale for investors chasing yield.
For starters, let’s just look at Fortress as an individual company.
FIG the Stock
FIG manages more than $46 billion, including traditional asset management as well as private funds.
The flat fees for running money are nice, but obviously the biggest driver of profits is the success of Fortress’ investment strategy. Consider, for example, the recent headline that Fortress will double its money on RailAmerica (NYSE:RA) after taking the company public and courting offers recently to win a nearly $1.4 billion price tag.
Of course, one deal alone doesn’t make a company successful. And if you look at the long-term performance of Fortress Investment Group stock it’s clear that there hasn’t been a lot to get thrilled about. It has a five-year growth rate of -10%, revenue growth has been hard to come by and the company has operated at a loss for every single quarter since at least the beginning of 2008. I didn’t bother to look back any earlier than that because, well, the numbers say everything. Take a look at the fundamentals for yourself.
Spotty revenue? No profits? No thank you.
Throw in the ugly long-term performance — down 16% since 2010 while the S&P has added 20% gains, and losses of 34% since 2011 while the S&P is up 5% — and you see the risks.
Investment Management Stocks as a Sector
The reason behind this trouble, of course, isn’t necessarily bad management at Fortress. It’s just a crappy market in general, with not a lot of money at play and not a lot of impressive investments to chase. Investing is not an easy business right now, for individuals like you and me or for bigwigs like Fortress.
And in full disclosure, competitors have been equally whacked. Och-Ziff and Apollo’s returns are even uglier from 2010 and 2011 to today. Even big boys like Goldman Sachs (NYSE:GS) have been brutalized.
If you believe in a secular bull market lifting the investment business or that deals like RailAmerica are going to come hot and heavy to bring future profits, I suppose there’s a case to be made for a recovery in Fortress or other investment managers.
But frankly if you believe in the return of a bull market for investing … well, why not just invest in opportunities you personally believe in instead of investing in an investment firm like Fortress? Isn’t that why you’re visiting InvestorPlace.com and writing me emails, after all?
Fortress and Dividends
You might be saying, “But Fortress pays a 5% yield.”
To that I say, “It does — for now.”
You just looked at the fundamentals. The company is bleeding cash. Sure, it has $1 billion in long-term investments and $250 million more in cash sitting around. With some 514 million shares outstanding a 20 cent annual dividend is “only” $100 million and not crippling.
Again, “For now.”
Consider that Fortress was paying over 20 cents a share before the market crashed in 2008 and then suspended its dividend until this year. There’s no guarantee that the nickel payment is going to stick and obviously the company doesn’t mind eliminating its payout based on past results.
In short, investing for yield in a company that’s bleeding cash and has a history of slashing payouts is a risky proposition.
Do you have a stock that’s on your mind? Drop me a line at email@example.com and I’ll take a look at it.
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.