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Strategies & Market Trends : Market Trends & Market Chatter (Investment Ideas)
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To: Ms. Baby Boomer who wrote (4291)6/29/2022 6:07:09 PM
From: Ms. Baby Boomer1 Recommendation

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Morgan Stanley Vs. Goldman Sachs:
Which Is The Better Dividend Buy?

On June 27, Morgan Stanley ( MS) and Goldman Sachs ( GS) announced dividend increases after they cleared their annual stress test.

Morgan Stanley upped its dividend by almost 11% to $0.7750 a share, while Goldman Sachs increased its quarterly payout by 25% to $2.50. Morgan Stanley’s annualized payment of $3.10 yields 4.0%. Goldman Sachs’ annual payment of $10 yields 3.3%.

Both of these dividend yields are incredibly healthy. However, If I could only buy one stock, read on, and I’ll answer which bank is the better buy for investors looking for income or capital appreciation.

Goldman’s 25% Increase Doesn’t Make GS The Better Buy? Goldman Sachs’ dividend increase was more than double Morgan Stanley’s. I believe that dividend growth is more important than dividend yield. The same principle applies to earnings growth and earnings yield.

Ultimately, because dividends follow earnings, the growth matters, not the yield. Therefore by this measure, at least, Goldman Sachs is the better dividend stock to buy.

Of course, there’s so much more to a quality bank stock than a healthy dividend. The quality of its revenue and earnings is equally essential.

Morgan Stanley’s Q1 2022 report noted that its revenues in the quarter of $14.8 billion were the second-highest in its history behind only Q1 2021 with $15.7 billion. Another piece of positive news was the bank’s efficiency ratio --- its operating expenses dividend by net income -- it was a reasonably healthy 69%. Anything under 70% is always welcome.

Here’s what CEO James Gorman had to say about Q1 2022:

“After doubling our dividend last year, we are raising our dividend 11% and continuing to buy our stock under a new $20 billion multi-year share repurchase authorization. The strength and stability of our franchise and our capital cushion provide us the flexibility to continue to invest for future growth while also returning capital to shareholders,” Gorman stated in its press release.

Further, even though its revenue and net income were lower this year than last, its Wealth Management segment had good numbers. For example, its fee-based client assets grew 19.0% to $1.87 billion from $1.57 billion a year earlier. Further, its net new assets increased 35.4% to $142.0 billion from $104.9 billion in Q1 2021. Lastly, its loans were $136.7 billion, 30.3% higher year-over-year.

As of June 23 and its stress test results, Morgan Stanley’s U.S. Basel III Standardized Approach Common Equity Tier 1 (CET1) was 13.3%, identical to Goldman Sachs’ CET1.

Overall, since 2009, Morgan Stanley’s Wealth Management and Investment Management segments have become a much more significant part of its business. In 2009, the segments accounted for 34% of its overall revenue. Today, it’s more like 50%.

As a result, its return on tangible common equity has grown from 8% to 20% over the past 12 years. Remember, dividends follow earnings.

What About Goldman Sachs? As I said, their CET1s were identical after the Federal Reserve’s stress tests. That’s not going to help determine the better buy.

On the top line, GS had Q1 2022 revenue of $12.9 billion, 27% less than a year earlier. Morgan Stanley’s Q1 2022 revenue decline was less than 6%. However, Goldman Sachs’ efficiency ratio was 59.7% in the quarter, almost 10 percentage points lower. That’s expense control and then some.

Other positives for Goldman Sachs in the quarter included:

A 23.3% increase in net interest income over last year to $1.83 billion. Total loans of $166 billion, $29 billion higher than Morgan Stanley. Its tangible book value per share increased 16% to $275.13. In April, Goldman Sachs announced that it completed its 1.7 billion Euro ($1.77 billion) acquisition of NN Investment Partners. The addition brings its total assets under supervision to $2.8 trillion, $600 billion of which is in Europe. The move improves the company’s Environmental, Social, and Governance investments. NN had more than 90% of its assets under supervision in ESG-related investments.

As for a valuation, GS is trading at 7.76x its forward earnings and 1.95x its sales. MS trades at 10.49x forward earnings and 2.53x revenue. Both of these are considerably higher than Morgan Stanley’s multiples.

The Bottom Line VerdictOver the past three years, Goldman Sachs’ annualized growth rate for revenue and net income was 21.3% and 27.4%, respectively. Morgan Stanley’s were 14.4% and 19.8%.

As I said, dividend growth follows earnings growth. By this measure, Goldman Sachs is the better stock to buy.

However, Goldman’s CEO, David Solomon, was far more subdued about its first quarter:

“Our results in the quarter show we continued to effectively support our clients and I am encouraged that our more resilient and diversified franchise can generate solid returns in uncertain markets,” Solomon stated in its press release.

Despite a more subdued Q1 2022 report, I like Goldman Sachs’ lower valuation at this point. Every little bit helps in this market. If I could only buy one of them, I’d buy GS....

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