Shares of Liontrust Asset Management (LSE: LIO) are up almost 10% this week. This is an impressive little run no doubt. But for investors in the stock, it’s just another week in what has been a very lucrative half-decade. The stock is up 65% in the past year and an incredible 567% over the past five years. Assuming dividends had been reinvested, the total shareholder return would have been closer to 787% for the five-year period. So how has this little known dividend stock achieved this on a stock exchange that has consistently underperformed and should I be buying it?
Beating its peers
As Liontrust is an asset management firm, I can compare it to other brokerage service companies. Intermediate Capital Group and 3i Group returned 218% and 105%, respectively, over the same five-year period. Liontrust has far outstripped its peers in this regard. But for the sake of certainty, say I wanted exposure to the financial services sector generally back in 2017 and chose banking stocks. Lloyds, Barclays and HSBC would have lost me 18%, 14% and 31% of my investment, respectively. I think there’s simply no comparison in the sector to what Liontrust has achieved and it seems like the market is starting to realise the underlying value of this stock.
Liontrust is structured very similarly to a hedge fund. It employs several different strategies to make a profit for its investors. In 2021 it almost doubled its assets under management (AUM) from £16bn to £30.9bn. This huge influx of extra cash meant that net income also doubled. Free cash flows, which represent the actual cash flowing through the business after deducting operational costs, have almost tripled in the past two years. They went from £15.6m in 2019 to £43.4m in 2021. Positive trending free cash flows are always a plus, as they indicate a growing ability for the company to generate money that can then be returned to me as an investor.
Among the positives is the lack of long-term debt on the balance sheet. Interest payments on long-term debt cripple the ability of a business to reinvest revenues and grow the business. Therefore, Liontrust carrying almost none is very encouraging to see. Also worth noting is the recent move into the ESG area with its Sustainable Future fund managing £13.2bn in assets, making it by far the largest in the UK.
So back to the question of whether I’d buy. From a growth perspective, I think there’s still a lot of upside to this stock, but from a value perspective, it’s not something I’d look to hold for life based on what I’m currently seeing. Liontrust doesn’t sell a unique product or unique service and with a market cap of just £1.46bn, it doesn’t benefit from from competitors facing a high cost of entry. Warren Buffett might say it has no durable competitive advantage or moat.
That being said, even though I’m a value investor at heart, I would buy this stock today as part of the smaller growth part of my portfolio. The potential upside in the short term is simply too tempting to pass up, I feel.
Stephen Bhasera has no position in any of the shares mentioned. The Motley Fool UK has recommended HSBC Holdings and Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.