Blackstone (BX -0.73%) has gotten bludgeoned by the current bear market in stocks. Shares of the leading alternative asset manager have tumbled more than 40% from their high since the market’s peak last year.
While the bear market has proved challenging for Blackstone, it will ultimately give way to a new bull market. That eventual upturn is a big catalyst for Blackstone and its big-time dividend. Here’s why the stock could rally sharply in the next bull run.
Differentiated performance in a bear market
Blackstone has two core revenue drivers: asset management fees and performance revenues. The company generates recurring management and advisory fees for managing investments for clients. As assets under management grow, fee-related income flows higher.
In addition, the company realizes performance revenue as its funds achieve and exceed their return targets. The company often earns a share of the profits above a certain return threshold. So, as its investors do well, Blackstone also benefits.
While last year was brutal for public stock and bond market investors, it was much better for those invested in funds managed by Blackstone. CEO Steve Schwarzman stated on the fourth-quarter call:
The year in which the typical investor was [losing] somewhere between 15% and 25% of their money, our limited partner investors had a highly differentiated outcome. Our flagship strategies in real estate, private credit, and secondaries appreciated 7% to 10% while those losses were occurring elsewhere. Our hedge fund solutions business achieved a gross composite return of 5%, with positive returns every quarter of the year. Our corporate private equity, tactical opportunities, and liquid credit strategies were down only modestly for the year between 1% and 3%.
Because many of its funds outperformed last year, Blackstone’s business delivered solid results. The company’s assets under management (AUM) grew by 11% to $974.9 million. That helped drive a 9% increase in its fee-related earnings to $4.4 billion ($3.65 per share). Meanwhile, total distributable earnings rose 7% to $6.6 billion ($5.17 per share). The company returned most of its distributable earnings ($6.1 billion) to shareholders via dividend payments ($4.40 per share — giving it a 5.4% dividend yield at the recent share price) and share repurchases.
From a headwind to a tailwind
Blackstone became a victim of its success toward the end of last year. Some of its funds geared toward high-net-worth investors experienced a surge in redemption requests as those investors asked to redeem a portion of their investment. Some needed the money to cover margin calls, while others wanted to reallocate the capital to other investments.
The headliner was its non-traded REIT, Blackstone Real Estate Income Trust (BREIT), which has had to limit redemption requests for the past several months because they exceeded the company’s cap. These redemptions are a headwind for Blackstone because BREITs assets aren’t growing as fast due to the increased outflows.
However, while investors often pull their money out of investment funds during a bear market, they pour capital into funds during a bull market. That was certainly the case for BREIT in 2021. The REIT hauled in a record-smashing $25 billion, nearly 70% of all the funds raised by non-traded REITs that year.
A new bull market should reverse the outflows from Blackstone’s funds and turn the spigot of inflows back on. An estimate by alternative asset data and insight provider Preqin sees industrywide alternative assets under management doubling by 2027 to $18.3 trillion. It sees high-net-worth investors being a big driver of that growth. That bodes well for Blackstone, which has created several products for retail investors, including BREIT. It should see a flood of inflows into these products as investors seek to capitalize on the next bull market.
That would grow the company’s fee-related earnings and position it to capture higher performance revenue. Those dual drivers could power accelerated distributable earnings growth in the coming years. That would allow Blackstone to pay even bigger dividends. Higher earnings could put a charge in the company’s stock price, helping fuel big-time total returns when adding its lucrative dividend income.
Poised to capitalize on the next bull market run
While Blackstone has performed well during the bear market, the downtrend has still been a headwind for its business. However, bear markets don’t last forever. When the next bull market arrives, it should be a major catalyst for Blackstone. The company should see a surge of inflows, which will drive up its fee-related income and position it to generate even more performance revenues in the future. That should fuel a rally in its stock while supplying Blackstone with more money to pay dividends. Blackstone is a great stock to buy before the next bull market run begins.
Matthew DiLallo has positions in Blackstone and has the following options: short June 2023 $60 puts on Blackstone. The Motley Fool has positions in and recommends Blackstone. The Motley Fool has a disclosure policy.