If there is a case to be made for investing in investment banks, it is difficult to make a case against Goldman Sachs Group Inc (NYSE:GS). You can make a case in favor of several of the competitors of GS stock, but ultimately, few are going to stack up against the 800-pound gorilla.
Goldman Sachs is transitioning these days, as trading revenues have been hit hard and underwriting and lending grow. The key to survival for any business is to change with the times, and GS stock remains the gold standard as far as investment banking is concerned.
GS stock can be difficult to evaluate because trading revenues change from quarter to quarter. Even then, its other divisions may ebb and flow depending on many variables. In general, an investor in GS stock hopes to see a general upward trajectory.
In its last earnings report, the numbers were quite solid — for the most part. Financial advisory revenues grew to $772 million from $709 million in the prior year, a 9% increase. But they fell from $911 million in just the previous quarter, a 15% decrease. Total underwriting jumped 61% year-over-year to $1.36 billion, giving the investment banking division a total increase of 44% YOY to $2.14 billion in revenue.
Trading was indeed hammered. Fixed income, current, and commodities income cratered by 50% to $1 billion. Equities client execution fell 51% to $223 million, commissions and fees were flat at $737 million, and securities services grew 3% to $409 million. Together, the division fell by 34% — some $1.2 billion.
Struggles for GS Stock
This was one of the worst trading revenue quarters since the financial crisis.
On the investing/lending side, revenues grew $174 million to $1.658 billion, an increase of 12%. Investment management grew $58 million to $1.66 billion.
All in all, GS stock revenues fell 4% to $7.8 billion. But that’s still $7.8 billion in revenues. And for heaven’s sake, Goldman has almost $1.5 trillion in assets under supervision. Maybe that’s why GS stock didn’t get destroyed today.
What drives trading revenues? Volatility. The more volatile the bond and equity markets are, the more emotion drives trades, and the more money GS stock makes.
It also causes computer programs to trigger various trades as well. We are in a period of extremely low volatility. For the time being, this is going to continue. In the meantime, Goldman Sachs stock is trying to pivot to grow these other lines of business so it doesn’t have to rely on trading revenues.
Nor is this problem unique to Goldman Sachs stock. All the banks are struggling with trading revenues, particularly in fixed income.
GS Stock Will Love a Correction
However, eventually the market is going to correct. And when that happens, GS stock is going to be loving every minute of it. Those crazy corrections and whipsaw emotions will cause trading volume to spike, and the fees along with it.
Meanwhile, GS has been diligently returning capital to shareholders. Its share count has declined by a third since 2011 and its dividend has more than doubled. It pays $3 per share every year in dividends, representing a yield of 1.17%.
It’s tough to go against GS stock when it continues to trade at all-time highs even amidst a weak quarter.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 23 years’ experience in the stock market, and has written more than 1,800 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.