JTC provides fund, corporate, and private wealth services to institutional and private clients around the world. The company offers fund services in a range of asset classes, including real estate, private equity, renewables, hedge, debt, and alternative asset classes.

What triggered today’s fall?

Tuesday’s fall came after JTC increased its dividend and said it was upbeat about its outlook. The asset manager reported a 24% increase in underlying annual profit in 2021. Underlying pre-tax profit rose to £24.9m in the year to the end of December from £20.1m a year earlier.

The firm had been acquiring asset managers and made seven purchases in 2021. It said that growth excluding acquisitions was 9.6%. JTC added that it had made a positive start to 2022 and expected further growth and operational improvements. It also said there were a number of acquisitions on track to be completed, while there were more in the pipeline.

It also announced a 13.6% increase to its dividend, the increase taking the payment to 7.67p. The figure means the dividend yield is around 1%, which isn’t a great return, especially considering soaring inflation rates — the highest seen in decades. Prior to this, I could have expected around a 0.88% dividend yield at current prices.

The stock also had its “buy” rating restated by analysts at Berenberg in a report issued on Tuesday. Shore Capital followed Berenberg in restating its “buy” rating as well.

Is this stock right for my portfolio?

I don’t think JTC looks overly cheap right now and I think some investors would have hoped for a bigger increase in its dividend payments, perhaps driving the share price fall. I know this group is growing, but a lot of its value is in continued and future growth. The stock is valued at around £1.1bn but underlying profits only reached £24.9m last year.

I also think there are better value stocks in the sector. Instead I would look at companies such as Bristol-based investment manager Hargreaves Lansdown. Hargreaves, despite a recent fall, still has positive fundamentals and is a market leader with its investment platform. Its price-to-earnings ratio is around 15, considerably less than JTC.

Despite my pessimism, JTC has previously been praised by Shore Capital for having a “high degree of revenue visibility and disciplined approach to M&A”. Shore also noted that earnings per share momentum has been relatively resilient and expected it to continue.

But I’m not buying. The main reason I’m steering clear of this one is because I’m favouring higher-dividend stocks right now. There are a number of reasons for this, the first is that dividend payments can help my portfolio negate inflationary pressure. Higher interest rates and inflation have pushed me to favour security of dividend in the near term over long-term growth potential.

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Now, this was indeed a ‘special’ dividend representing part of the proceeds from the management buyout of another part of the business, but I do see good potential for the underlying business to continue paying more down-to-earth, but still impressive, dividends.

A big part of this is the high-margin, highly-scalable nature of the wealth management business. In the first half of this year, the business generated revenue of £385m and kicked off £110m in underlying operating profits as margins bumped up to 29%.    

In these same six months, the company attracted £2.2bn in net client fund inflows, which together with investment returns, took its assets under management up to £116.5bn. The fund management industry is a competitive one but with equity markets buoyant, trillions in potential inflows to target, and its own management team now able to focus solely on growing the business, rather than being part of a larger parent company, I expect Quilter has plenty of space to continue expanding.

And thanks to the inherent operational leverage in its business model, there’s also good scope for further improvements to margins. This would mean higher earnings, and thanks to the business’s low capital investment needs, much of these can be returned to shareholders.

In H1 the company’s 5.5p underlying earnings per share, which exclude the aforementioned disposal, increased 25% to 5.5p. For the full year, analysts are estimating EPS of 10.75p rising to 11.5p in 2019 with a dividend payment that year of around 5p.

At today’s share price that would mean a yield of 3.8%. Certainly not the 8.8% yield being generated this year, but to my eyes a very sustainable payout from a company worth following given its prospects for revenue and profit growth.

A picks and shovels option

Another player in the wealth management space that appeals to me is fund services provider JTC (LSE: JTC). Rather than managing money for clients like Quilter, it provides administration services for money managers ranging from private equity groups to ultra-high-net-worth individuals. The company has been public for only a few months, but thanks to increasing regulation, geographic expansion and acquisitions that have broadened the array of services it offers, it has a compelling track record with compound annual revenue growth of 23% over the decade to 2017.

Judging by the company’s interim results released this morning, this growth is far from done. Revenue during the six months to June rose 25.2% to £35.3m thanks to organic growth of 8% and two acquisitions completed last year. The integration of acquisitions and a focus on cost controls led EBITDA margins up from 23.6% to 29.9% during the period as well, meaning the business generated £10.5m in underlying EBITDA.

With an uptick in the value of its potential bidding pipeline and another acquisition completed following the end of June, this growth looks set to continue into H2 as well. At 24 times consensus forward earnings, JTC’s shares are not cheap. But with a strong record of growth, high levels of recurring revenue and less cyclicality than fund managers, I think this business is one to watch closely.

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