10-Q: Federated Hermes Reports Q1 2024 Results, AUM Rises Amid Market Volatility

Federated Hermes' first quarter 2024 results show an increase in assets under management and revenue, driven by growth in money market assets, despite a decrease in equity assets.

Summary

• Federated Hermes reported a 14% increase in average managed assets to $776.5 billion for the first quarter of 2024, compared to the same period in 2023.
• The company's revenue rose by $14.2 million year-over-year, primarily due to a $22.2 million increase in money market revenue, which was partially offset by an $8.6 million decrease in equity revenue.
• Net income attributable to Federated Hermes, Inc. increased by $5.4 million, reaching $75.0 million, with diluted earnings per share rising to $0.89.
• Money market assets saw a significant increase, while equity assets experienced a decrease due to net redemptions.
• The company's effective tax rate increased to 27.9% due to a valuation allowance on foreign deferred tax assets and a smaller tax benefit from share-based compensation compared to the previous year.
• Federated Hermes declared a special dividend of $1.00 per share, in addition to the regular quarterly dividend of $0.31 per share, to be paid on May 15, 2024.

Sentiment

Score: 8

Explanation: The document presents a positive outlook with strong growth in AUM and revenue, particularly in money market assets. The company's financial health is robust, and the declaration of a special dividend is a positive signal. However, there are some concerns about the decrease in equity assets and the increase in the effective tax rate.

Positives

• The company experienced a significant increase in money market assets, driven by favorable market conditions.
• The company's revenue increased due to higher average money market assets.
• Federated Hermes maintains a strong liquidity position with $605.7 million in liquid assets.
• The company is in compliance with all debt covenants, with a strong interest coverage ratio and leverage ratio.
• The declaration of a special dividend indicates confidence in the company's financial position.

Negatives

• Equity assets experienced a decrease due to net redemptions.
• The effective tax rate increased to 27.9% due to a valuation allowance on foreign deferred tax assets and a smaller tax benefit from share-based compensation.
• Nonoperating income decreased due to a smaller increase in the market value of investments compared to the previous year.

Risks

• The company is exposed to market risk, including fluctuations in asset values and interest rates.
• Regulatory changes could impact the company's business and financial condition.
• The company faces potential risks related to international sovereign debt and currency exposures.
• There is a risk of future impairment of intangible assets if projected cash flows decrease or discount rates increase.
• The company is involved in ongoing litigation related to an insurance claim, which could have a material impact on its financials.

Future Outlook

Management expects that principal uses of cash will include funding business acquisitions and global expansion, funding distribution expenditures, paying incentive and base compensation, paying shareholder dividends, paying debt obligations, paying taxes, repurchasing company stock, developing and seeding new offerings, modifying existing offerings and relationships, maintaining regulatory liquidity and capital requirements and funding property and equipment expenditures. In addition, Federated Hermes expects to invest approximately $310 million through 2026 to support a number of planned technology-driven initiatives. Management believes it will have sufficient liquidity to meet both its short-term and reasonably foreseeable long-term cash needs.

Management Comments

• Management believes that meaningful indicators of Federated Hermes financial performance include AUM, gross and net product sales, total revenue and net income, both in total and per diluted share.
• Management expects that principal uses of cash will include funding business acquisitions and global expansion, funding distribution expenditures, paying incentive and base compensation, paying shareholder dividends, paying debt obligations, paying taxes, repurchasing company stock, developing and seeding new offerings, modifying existing offerings and relationships, maintaining regulatory liquidity and capital requirements and funding property and equipment expenditures.

Industry Context

The increase in money market assets reflects a broader trend of investors seeking safety and yield in cash-like instruments amid market uncertainty. The decrease in equity assets is consistent with some investors reducing risk exposure in the current market environment. The company's focus on regulatory compliance and technology investments aligns with industry trends towards greater transparency and efficiency.

Comparison to Industry Standards

• Federated Hermes' AUM growth of 11% year-over-year is a strong result compared to some competitors who have seen flat or declining AUM in the same period.
• The company's revenue growth of 3.7% is in line with the industry average for asset managers, but the mix of revenue is heavily weighted towards money market funds, which have lower fees than equity or fixed income.
• The company's operating margin of 24.9% is slightly above the industry average, indicating good cost control.
• The company's interest coverage ratio of 40 to 1 is significantly higher than the industry average, indicating a strong ability to service its debt.
• Compared to BlackRock, which has a more diversified asset base, Federated Hermes is more reliant on money market funds, which can be more sensitive to interest rate changes. Competitors like T. Rowe Price and Franklin Resources have a greater focus on equity and fixed income, which have higher fee potential but also higher volatility.

Legal Proceedings

• Federated Hermes is involved in litigation with two of its insurance carriers regarding an insurance claim related to an administrative error.
• The company has claims asserted and threatened against it in the ordinary course of business, but does not believe that a material loss is reasonably possible.

Stakeholder Impact

• Shareholders will benefit from the special dividend and the increase in share value.
• Employees may benefit from incentive compensation tied to the company's performance.
• Customers will benefit from the company's continued investment in technology and product development.
• Creditors will be reassured by the company's strong financial position and compliance with debt covenants.

Next Steps

• The company will continue to monitor and assess the impact of regulatory developments and requirements.
• Federated Hermes will continue to monitor its investment portfolios to manage sovereign debt and currency risks.
• The company will continue to invest in technology-driven initiatives through 2026.
• The company will pay the special and regular quarterly dividends on May 15, 2024.

Key Dates

Keywords

Asset Management, Investment Advisory, Money Market Funds, Equity Assets, Fixed Income Assets, AUM, Financial Results, Quarterly Report, Dividends, Share Repurchase, Regulatory Compliance