Over the weekend, press reports suggested that Schroders (LSE: SDR), one of the largest wealth management groups in the UK, was in talks with Lloyds Bank to create a leading wealth management business.
Schroders has come out today to confirm that these reports are indeed true. In a statement issued to the market, the company said: “Following recent media speculation, Schroders plc confirms that it is in discussions with Lloyds Banking Group plc with a view to working closely together in parts of the wealth sector.” The press release goes on to say that “discussions are ongoing” and there can be “no certainty” a formal arrangement will be made.
Joint venture
According to initial speculation, which was first reported by Sky News over the weekend, Lloyds is planning to project its wealth management unit into a 50/50 (or to be more specific 50.1% Lloyds, 49.9% Schroders) joint venture (JV) with Schroders, while also taking a 19.9% stake in Cazenove Capital. Cazenove is a division of Schroders that manages money for wealthy individuals.
Even though we only have the outline of the deal, it’s clear this could be a massive windfall for Schroders. By agreeing to work with Lloyds, the wealth manager has the potential to market its products (and those of the JV) to Lloyds customers. As one of the largest banks in the UK, and the largest mortgage lender, Lloyds is arguably the most recognisable financial services brand in the country. By partnering up, Schroders should be able to leverage Lloyds’ brand recognition to boost its presence in the market.
Growth potential
But what does this mean for shareholders? Well, I’m almost certain that the tie-up will lead to faster growth at Schroders. The Lloyds wealth management unit only has £13bn of assets under management (according to the Sky report), which pales in comparison to Schroders’ total assets under administration of £449.4bn (at the end of June). However, it’s also believed that the asset manager will be awarded part of the £109bn investment mandate Lloyds pulled from Standard Life earlier this year.
Before today’s announcement, City analysts were already expecting steady earnings growth from Schroders over the next two years. Earnings per share (EPS) growth of 3% was projected for 2018, and 5% for 2019.
Over the next few weeks, I believe these forecasts could be revised higher. The JV is unlikely to generate much in the way of extra profit over the next six months, but Lloyds has made growing the division a key pillar of its three-year business plan. With a respectable name like Schroders (the Queen’s wealth manager, if rumours are true) helping to manage its portfolios, growth should only accelerate.
Today, investors can snap up shares in this business for just 12.9 times forward earnings. In my view, this multiple is not too demanding, considering the growth opportunities available. On top of the attractive valuation, there’s also a dividend yield of 4% on offer.
So overall, if you’re looking for a blue-chip growth stock that could help you beat the FTSE 100, I believe Schroders could help you meet this aim.
