Friday, July 31, 2009

Volume 3, Issue #71

Also in Today's Issue...

The Blackstone Group (NYSE: BX) is a leading global asset manager with around $90 billion assets under management. Founded in 1985, the private equity firm was once the exclusive preserve of wealthy private and institutional investors like pension funds and endowments. It went public in 2007 and raised a massive $4 billion in one of the largest initial public offerings on record. The firm holds stakes in over 40 companies, manages hedge funds and other funds, and oversees corporate mergers, acquisitions, and restructurings.

BX has paid quarterly distributions of $0.30 per share since going public. Because of the difficult and uncertain environment in late 2008/early 2009, Blackstone canceled its March 2009 dividend. Management cited the need to improve cash flow. However, the company reinstated the $0.30 per share dividend in June. Going forward, an annual dividend of $1.20 equates to a yield of 10.5% ($1.20/$11.42). You can reach Investor Relations at 1-888-756-8443.

While BX pays out roughly $322 million per year in common share dividends, the firm generated about $2.3 billion in free cash flow over the past year, has $776 million in cash, and an additional $400 million in liquid borrowings. In addition, total debt is quite manageable at just 11% of equity.

That said, given the company has already cut its dividend once, investors should realize that Blackstone's distributions are by no means guaranteed.

As a private equity firm, the company makes money for itself and its investors by buying distressed companies, taking them private, turning the businesses around and selling them for a profit. The firm has delivered stellar returns to its investors for years and become one of the world's premier investment managers. However, like any other financial firm, Blackstone has felt the pinch of the financial crisis.

The company has been losing money in recent quarters, but is expected to return to profitability for 2009. In fact, analyst estimates call for BX to grow earnings +130% this year and +171% next year. Things have already started to turn around. Blackstone reported a first-quarter loss of $231.6 million, which was much better than the $415.2 million in the fourth quarter of 2008.

Most of the losses came from the firm's real estate investments, as property values continued to depreciate. The private equity and hedge fund businesses performed better in the first quarter than in both the fourth quarter and the year-ago period because of higher performance-based fees and lower investment losses. Also, advisory fees were +29% higher than last year as companies sought restructuring advice in this tumultuous environment.

In the past, the private equity segment has made huge profits through leveraged buyouts of undervalued companies that Blackstone was able to turn around and sell for a profit. However, in this environment the company is finding it difficult to generate that business primarily because credit for the buyouts has become either unavailable or too costly. In fact, Chief Executive Steve Schwarzman said that new business deals available are down -80% from a year ago. On the other end, Blackstone also is having trouble selling previously purchased companies in this market.

On the positive side, the financial crisis has created an abundance of out-of-favor and undervalued companies that have been Blackstone's bread and butter. As the world's premier private equity firm, BX should get first crack at the best deals out there and be first in line to tap credit and equity markets when conditions improve.

Although it is difficult to see the company generating the level of profits it did in past years, BX looks to be on the road to recovery and is likely to continue appreciating as market conditions improve.

Action to Take --> Blackstone offers a tempting double-digit yield and capital gains potential. However, given the company has shown it will cut the dividend if difficult conditions persist, BX is appropriate for a more aggressive income investor.

Good Investing!

-- Carla Pasternak
Editor
High-Yield Investing

Editors Note: In Carla's latest issue of High-Yield Investing, she profiles an undervalued exchange-traded bond that yields a staggering 10.6%. Click here to get the name of this security and more information on High-Yield Investing.