Elevator Pitch
My investment rating for Stifel Financial Corp. (NYSE:SF) stock is a Buy. Previously, I wrote about SF’s top line growth prospects and the company’s latest acquisition in my prior August 8, 2022 update for the company.
I turn my attention to Stifel Financial’s current stance on share repurchases and its strong recruiting numbers in this article. I have decided to upgrade my rating for SF from a Hold to a Buy, taking into account the high probability of Stifel Financial buying back its own shares at a faster pace in the near future, and the company’s reputation as an employer of choice for advisors.
Share Repurchases
At the recent Wolfe Research Wealth Symposium (event transcript obtained from S&P Capital IQ) on November 8, 2023, SF’s CEO, Ronald Kruszewski, stressed that “one of the best acquisitions” is “to buy our own stock at a multiple, which is at a significant discount to what anyone is showing me on the M&A side.” The CEO of Stifel has sent a clear message with his comments at the company’s latest investor event that SF is keen to be more aggressive with share buybacks.
Actions speak louder than words. Stifel bought back 1.9 million and 4.9 million of the company’s own shares in Q3 2023 and 9M 2023, respectively. SF disclosed at its third quarter earnings call in late October that the company has “deployed more capital into share repurchases” for the first nine months “than any of the past five full years.” The company also revealed in its Q3 results press release that it has expanded its share buyback authorization by another 10 million shares to bring the total number of shares it can repurchase as of September 30, 2023 to 14.2 million.
Earlier, SF’s CEO noted at the company’s Q3 earnings briefing that it “recognizes the value created for our shareholders by share repurchases at the current price level and valuation.” Stifel CFO also mentioned at this recent quarterly investor call that he “would expect it (share buybacks) to be higher” based on “the current price.”
As per S&P Capital IQ’s valuation data, Stifel Financial has traded between 9.3 times and 10.6 times consensus forward the next twelve months’ normalized P/E in 2023 year-to-date. SF’s current consensus forward normalized P/E multiple is 10.4 times based on the company’s last traded stock price of $61.42 as of November 17, 2023, and this is -23% below the stock’s 15-year mean P/E ratio of 13.5 times.
It is reasonable to expect Stifel Financial to execute on a more substantial amount of value-accretive share repurchases in the foreseeable future, based on a review of SF’s management comments, actual buybacks, and valuations.
Financial Advisor Recruiting
Stifel Financial shared in its Q3 2023 earnings presentation slides that the company recruited “36 financial advisors” of which two-thirds of them are “experienced (professionals) with total trailing twelve month production of $24.3 million” in the most recent quarter. For the third quarter of this year, SF’s Global Wealth Management segment revenue expanded by +10% YoY to $769 million, which was the highest quarterly top line achieved by this business in Stifel Financial’s history.
It is possible to infer from the data presented above that an increase in the number of financial advisors for SF drives a corresponding growth in the company’s Wealth Management segment revenue. Ronald Kruszewski made a similar connection between advisor count and client base at the November 8 Wolfe Research Wealth Symposium highlighting that “we (the Wealth Management business) gain clients because we attract advisers and we lose clients because we lose advisers.”
Growing revenue contribution from the Wealth Management business also translates into a more favorable top line mix for Stifel Financial. The percentage of recurring revenue (e.g. management fees) for SF as a proportion of its top line increased from 66% in 2019 to 78% for 2023 as disclosed in the company’s Q3 results presentation. This improvement in revenue mix in the last 5 years coincided with the hiring of “670 financial advisers with cumulative trailing 12-month production of approximately $430 million” during the same time period as per Stifel Financial’s disclosures at the third quarter results briefing.
Looking ahead, the growth outlook for Stifel Financial’s key Wealth Management business segment is positive, considering the attractiveness of the company in the eyes of prospective employees, which makes it easier for SF to do recruiting. In July 2023, SF announced that “J.D. Power has named Stifel the No. 1 investment firm for employee advisor satisfaction.” At its Q3 results call, Stifel Financial revealed that the company’s “recognition” by J.D. Power has “resulted in increased inbound calls from potential recruits.” It isn’t a surprise that prospective employees are taking into consideration the results of the J.D. Power survey in choosing their employers, so SF’s edge in advisor recruiting bodes well for the prospects of the Wealth Management segment.
Final Thoughts
SF has an edge in recruiting advisors, and this has positive read-throughs for its Wealth Management segment’s outlook. Stifel Financial’s current P/E valuation metric is below historical average, and the company seems to be interested in executing on share repurchases in a more aggressive way. These above-mentioned factors support a Buy rating for Stifel Financial.
