SEI Investments: One Of The Best Growth Stocks Retirees Can Safely Buy Today

Whenever I include the word “retire” – or retiree, retirement, or some other derivation – in an article, I’m reminded it must pass my mother’s sleep well at night, or SWAN, test first.

My mom is now officially retired, you see. And she’s on the prowl for safe dividend growth stocks. So every time I put “retire” in the title, it’s a signal for her to spot.

For the record, she doesn’t read all of my published articles. She’s got things to do and places to be, after all. That’s why I always remind her to check out the retirement-titled ones. Because they’re bound to contain some valuable, actionable content I want her to see.

So, mom – and all you other official retirees – go ahead and sit down with a good cup of coffee to take a closer look. I know it’s a long one, with more than 8,000 words, but I think it’s a good one nonetheless.

We’re talking about a terrific SWAN stock that can be purchased at a very attractive price.

Source

Screening for Blue Chips

In today’s growth-obsessed stock market bubble investors are willing to pay outrageous multiples for growth “at any cost,” similar to the speculative manias of the past such as:

  • the tech bubble (when some tech giants traded at 132 PEs)

  • the “Nifty-50” craze of 1965 to 1972 when these blue-chips averaged a 42 PE and some traded for over 90

(Source: Lance Roberts)

If you look at calendar year forward PE (using 2020 consensus) then the stock market currently is trading at near tech bubble valuations, about 60% historically overvalued vs 66% during the height of the tech bubble in 2000.

On a 12-month forward PE basis (one of the two proxies for broader market valuation I personally use) the market is “just” 38% historically overvalued.

But any way you cut it, stocks are trading at some of their richest valuations during the worst economy in 75 years.

S&P 500 Valuation Profile

Year

EPS Consensus

YOY Growth

Forward PE

Blended PE

Overvaluation (Forward PE)

Overvaluation (Blended PE)

2020

$124.79

-23%

26.1

22.8

60%

34%

2021

$163.32

30%

19.9

23.0

22%

35%

2022

$186.21

13%

17.5

18.7

7%

10%

12-month forward EPS

12 Month Forward PE

Historical Overvaluation

PEG

20-Year Average PEG

S&P 500 Dividend Yield

25-Year Average Dividend Yield

$143.79

22.7

38%

2.67

2.35

1.83%

2.07%

(Source: Dividend Kings S&P 500 Valuation and Total Return Potential Tool)

It’s important to note that valuations alone can’t be used for market timing purposes.

According to JPMorgan, from 1995 to June 2020 just 9% of 12-month returns and 45% of five-year returns are explained by fundamentals and valuations.

Sentiment/momentum/luck drives stocks in the short term which can last far longer than most people realize.

However, over 10-plus years 90% to 90% of total returns are determined by fundamentals and valuation mean reversion.

Time Frame (Years)

Total Returns Explained By Fundamentals/Valuations

1

9%

2

18%

3

27%

4

36%

5

45%

6

54%

7

63%

8

72%

9

81%

10+

90% to 91%

(Sources: JPMorgan, Bank of America, Princeton, Lance Roberts)

Bubbles exist because it usually takes about six years for fundamentals to begin overtaking sentiment and momentum.

What valuations can tell is the expected long-term total returns for stocks.

(Source: Lance Roberts)

The CAPE Ratio, or 10-year average inflation-adjusted PE, can’t be used for market timing, but it’s proven relatively accurate at forecasting 10-year future returns, which look pretty weak for the next five to 10 years.

S&P 500 Total Return Profile

Year

Upside Potential By End of That Year

Consensus CAGR Return Potential By End of That Year

Probability-Weighted Return (OTC:CAGR)

2020

-33.2%

-61.1%

-46.3%

2021

-11.7%

-8.4%

-6.4%

2022

3.2%

1.3%

1.0%

2025

30.9%

5.1%

3.9%

(Source: Dividend Kings S&P 500 Valuation & Total Return Potential Tool)

Fortunately, as our fellow Dividend King co-founder Chuck Carnevale likes to say “it’s a market of stocks, not a stock market.”

Quality blue chips, including fast-growth companies, are always on sale, if you know where to look.

Dividend Kings and Dividend Sensei recently opened a starter position in SEI Investments (SEIC), which is what I want to highlight today. I’m strongly considering an entry position as well.

Dividend Kings plans to keep building positions in the coming weeks as long as we can get this fast-growing 11/11 quality Super SWAN dividend champion (29-year dividend growth streak) at a good price or better.

SEIC Total Return Since 1991

(Source: Portfolio Visualizer)

Like most 11/11 quality Super SWANs SEIC is a proven long-term income and wealth compounding matching.

But like many growth stocks, it can be extremely volatile at times (33.5% annual volatility since 1991) and so you have to buy it at a reasonable to attractive valuation.

Over the past 20 years, SEIC has delivered 16% CAGR total returns, which is what analysts expect over the next five years.

So let’s take a look at what SEIC does and the four reasons we consider it one of the best growth stocks retirees can safely buy in this dangerous market bubble.

Introduction To SEIC: One Of The Best Fast-Growing Dividend Champions You’ve Never Heard Of

SEI was founded in 1968 in Pennsylvania.

Business Summary

SEIC provides back-office tech support services for asset managers and institutions.

Today, we serve about 11,300 clients, including banks, trust institutions, wealth management organizations, independent investment advisors, retirement plan sponsors, corporations, not-for-profit organizations, investment managers, hedge fund managers, and high-net-worth families.” – corporate profile.

(Source: Investor presentation)

SEIC may only be a $7.5 billion mid-cap but its manages $283 billion in assets and $632 billion is managed across its various platforms.

(Source: Investor presentation)

Think of SEIC as a financial tech company providing the mission-critical infrastructure for financial institutions.

(Source: Investor presentation)

For 52 years SEIC has been an industry leader in innovation and steadily expanded its services to become a one-stop-shop for financial clients.

(Source: Investor presentation)

SEIC has a long growth runway, created by being able to address the needs of the entire financial ecosystem.

(Source: Investor presentation)

Specifically, SEIC helps clients to address and overcome the various challenges facing the financial industry right now. SEIC, by helping clients grow their businesses, thus is able to reward shareholders and dividend growth lovers over time.

In private banking, 80% of clients have been with the firm for 10+ years, and no single customer represents more than 10% of revenue.

In terms of geography

But before we dive deeper into what makes SEIC’s business model and overall investment proposition so attractive, let’s begin by looking at why this is one of the safest and most dependable dividends on Wall Street, even during the worst recession in 75 years.

1. A Dependable Dividend In All Economic Conditions

The first thing we look at with any company is dividend safety, or if it doesn’t pay a dividend, the balance sheet.

Dividend Kings Safety Model

1

Payout Ratio vs safe level for the industry (historical payout ratio vs dividend cut analysis by industry/sector)

2

Debt/EBITDA vs safe level for industry (credit rating agency standards)

3

Interest coverage ratio vs safe level for industry (credit rating agency standards)

4

Debt/Capital vs safe level for industry (credit rating agency standards)

5

Current Ratio (Total Current Assets/Total Current Liabilities)

6

Quick Ratio (Liquid Assets/current liabilities (to be paid within 12 months)

7

S&P credit rating & outlook

8

Fitch credit rating & outlook

9

Moody’s credit rating & outlook

10

30-year bankruptcy risk

11

Implied credit rating (if not rated, based on average borrowing costs, debt metrics & advanced accounting metrics)

12

Average Interest Cost (cost of capital and verifies the credit rating)

13

Dividend Growth Streak (vs Ben Graham 20 years of uninterrupted dividends standard of quality)

14

Piotroski F-score (advanced accounting metric measuring short-term bankruptcy risk)

15

Altman Z-score (advanced accounting metric measuring long-term bankruptcy risk)

16

Beneish M-score (advanced accounting metric measuring accounting fraud risk)

17

Dividend Cut Risk In This Recession (based on blue-chip economist consensus)

18

Dividend Cut Risk in Normal Recession (based on historical S&P dividend cuts during non-crisis downturns)

Those fundamental metrics are then converted to dividend safety scores which estimate dividend cut risk in both a historically average recession and any particular economic downturn.

(Sources: Moon Capital Management, NBER, Multipl.com)

We estimate recession cut risks based on the S&P 500 representing a proxy for average quality companies, and then adjust for how severe the blue-chip economist consensus range expects GDP to decline in 2020 vs the average 1.4% contraction for recessions since 1945.

Safety Score Out of 5

Approximate Dividend Cut Risk (Average Recession)

Approximate Dividend Cut Risk This Recession

1 (unsafe)

over 4%

over 24%

2 (below average)

over 2%

over 12%

3 (average)

2%

8% to 12%

4 (above-average)

1%

4% to 6%

5 (very safe)

0.5%

2% to 3%

Here’s why SEIC scores a 5/5 on dividend safety, meaning about a 1 in 40 chance of a dividend cut during the worst recession in 75 years.

  • 2020 consensus FCF payout ratio: 27% vs 50% safe for this industry Debt/capital: 2% vs 20% safe

  • TTM Debt/EBITDA: 0.07 vs 1.5 or less safe (zero debt in Q2)

  • Interest coverage ratio: 747.4 vs 10+ safe (zero debt in Q2)

  • Current Ratio: 5.22 vs 1+ safe

  • Quick Ratio: 5.06 vs 1+ safe

  • S&P credit rating: NR

  • Fitch credit rating: NR

  • Moody’s credit rating: NR

  • Implied Credit Rating: A, AA, or AAA

  • Implied 30-year bankruptcy risk: 2.5% or less

  • Dividend growth streak: 29-years, dividend champion vs 20 Graham standard of excellence

  • F-score: 8/9 vs 4+ safe, 7+ very safe: very low short-term bankruptcy risk

  • Z-score: 16.83 vs 3+ very safe = ultra-low long-term bankruptcy risk

  • M-score: -3.02 vs -2.22 or less safe = ultra-low accounting fraud risk

  • Safety score: 5/5 very safe

  • Dividend cut risk in this recession: 2% to 3%

  • Dividend cut risk in a normal recessional: 0.5%

Today SEIC has no debt, but over the last 12 months, its cash/debt ratio was a sky-high 17.

(Source: Gurufocus)

Since it doesn’t pay for credit ratings (because it almost never sells bonds) in order to estimate long-term bankruptcy and run the Dividend Kings Investment Score on SEIC requires estimating an implied credit rating.

The average borrowing cost is now zero, so we have to rely on the debt metrics, including advanced accounting metrics like the F-score, Z score, and M score, which scan the quarterly filings every three months to estimate short-term, long-term bankruptcy risk and accounting fraud risk.

BLK (AA- stable rating)

(Source: Gurufocus)

Compared to AA-stable rated BlackRock (BLK), SEIC’s balance sheet is much stronger and its advanced accounting metrics and lack of current debt indicate that it could well earn an AAA credit rating if it were to pay for one.

JNJ (AAA stable rating)

MSFT (AAA stable rating)

(Source: Gurufocus)

In fact, the balance sheet is objectively stronger than even AAA stable rated JNJ and MSFT.

What about the pandemic effects on the business? Here’s CEO and founder Al West explaining why he remains confident in this company’s future.

The strengths of SEI shine best when the challenges are extreme. At SEI, we take immense pride in investing for the long term. We have proven business models that have been shaped over the past 50 years of experience. They are the bedrock of our ability to weather the uncertainties of today and emerge from the current crisis stronger and better positioned to take advantage of tomorrow’s opportunities.

Our secret to success is straightforward, remain focused on keeping our workforce healthy and productive, invest in our best-in-class technology, innovate continuously, and deliver world-class service and solutions to our clients. We will also be relentless in executing on our strategic vision and launching the growth generating initiatives we believe will be at the heart of our future successes.” – Al West

Like most businesses, SEIC is seeing a hit to its bottom line from this pandemic.

Second quarter earnings decreased by 20% from a year ago. Diluted earnings per share for the second quarter of $0.68 is a decrease of 17% from the $0.82 reported for the second quarter of 2019. We also reported a 2% decrease in revenue from the second quarter 2019 to the second quarter 2020. The first and second-quarter earnings results were affected by the arrival of the COVID-19 pandemic.” – Al West

However, the company continues to execute on its long-term growth plan and buy back stock at reasonable valuations.

During the second quarter, we repurchased approximately 1.6 million shares of SEI stock at an average price of $54.48 per share. That translates to $89.5 million of stock repurchases during the quarter. In the second quarter, we also continued our investment in the growth generating platforms…

The newest effort is One SEI which is a large part of our growth strategy. As you will recall, One SEI leverages existing and new SEI platforms by making them accessible to all types of clients, all adjacent markets and all other platforms.” – Al West

As I explain in the risk section, SEIC’s key risks include about 50% of revenues being tied to the equity markets, as well as its large stake in quant value asset manager LSV.

Regarding LSV, our earnings from LSV represent our approximate 39% ownership ventures during the second quarter. LSV contributed $28.3 million in income to SEI during the quarter.

This compares to a contribution of $37.8 million in income during the second quarter of 2019. Assets during the second quarter grew approximately $10.2 billion. LSV experienced net negative cash flow during the quarter of approximately $1.9 billion offsetting market appreciation.” – CFO

LSV generates about 25% of pre-tax profits for the company and represents one of the greatest investments in the history of capitalism. But due to value’s underperformance relative to growth this hedge fund has seen $1.9 billion in net asset outflows and as a result, SEIC saw a 27% decrease in YoY earnings contributions from LSV in Q2.

We all know value is not the segment of the market that people are in love with right now. And that being said, deep value is even less in love, people are less in love even with deep value.

But it’s interesting that when we talk to LSV, we get really a perspective on when they have gone through these tougher cycles in the past, a lot of firms that may have been in their space, the firm itself would potentially, whereas LSV is very disciplined.

They know what they are good at. They believe in what they are doing. They have strong conviction that the sun will shine again and they are going to be really well when it does.” – CFO

LSV did manage to sign up some new accounts and is currently hunkering down to ride out the current tech/growth-obsessed bubble.

Just like Buffett and numerous value investing legends underperformed during the 90s tech bubble, LSV remains confident it will be vindicated once the market returns to sanity.

Value Got Gutted In The Last Days Of The Tech Bubble

(Source: Ycharts)

Berkshire fell 46% during the terminal phase of the tech bubble, Realty Income 22%. Many value stocks were extremely out of favor and trading at a 50% discount (Realty yielded 11% and was 7X FFO).

During The Tech Crash Value Investors Were Vindicated

(Source: Ycharts)

During the tech crash Realty went up 85% and Berkshire 50% vindicating patient and disciplined value investors.

The best time to buy any business, but especially growth stocks, is during a downcycle, as long as it’s a quality company competently run.

Which is indeed the case with SEIC.

2. A Wonderfully Profitable Business With Excellent Management And Strong Long-Term Growth Prospects

(Source: Investor presentation)

90% of sales are monthly recurring contracted (3 to 5 years usually for banking clients) and extremely cash-rich.

A Free Cash Flow Minting Machine

(Source: Ycharts)

SEIC’s FCF margin is 28%, and has been rising over the past decade.

SEIC has become steadily more efficient at converting the top line into free cash flow, money left over after running the business, and investing in future growth.

FCF is ultimately what funds dividends, buybacks, and repays debt. It’s also what generates fundamental intrinsic value, which stock prices track.

SEIC’s FCF margins are on par with the most dominant and largest tech giants of today, the same companies being bid up into dangerous bubble valuations right now.

(Source: YCharts)

SEIC’s management is both skilled and very shareholder friendly.

For example, from 2014 to 2019 it returned over $2 billion in cash in the form of dividends and buybacks.

(Source: Investor presentation)

That equates to about 2% annual stock repurchases and of course the dividend, which has grown for 29 consecutive years making SEIC a dividend champion.

If its market cap becomes large enough to join the S&P 500 then it will become a dividend aristocrat.

Management has a policy of investing 8% to 10% of revenue each year into R&D to maintain its technological edge over rivals and ensure exceptional customer service.

(Source: Investor presentation)

In recent years R&D spending has been stable at 10% of sales.

Management quality is extremely important to long-term success because the world of business is complex and something is always going wrong. Challenges and headwinds exist for any company and shareholders pay executives handsomely to see those risks coming and adapt to them to ensure long-term growth.

SEIC was founded by Al West who remains the CEO today and owns 13% of the company.

SEI Investments merits a Standard stewardship rating.

Al West founded the company in 1968 when it created the first computer-simulated training technology for loan officers. West has served as the CEO and chairman since and owns or controls 13% of the shares outstanding. Since going public in 1981 at a split-adjusted price of $0.19 a share, investors have certainly benefited from his leadership.

The company’s seed investment in LSV Asset Management in 1994 was particularly accretive and now generates over 20% of the firm’s pretax income. Though West has been a driving force since inception, SEI’s segment leaders operate autonomously (each presents on the earnings call, for example), and we believe the firm has a deep talent bench.

SEI weathered the financial crisis reasonably well except for losses from structured investment vehicles related to money market funds. Given the severity of the crisis and the lessons learned, a repeat of these losses is very unlikely, in our opinion.

With no debt, SEI has a conservative capital structure. While there is a reasonable argument that a more aggressive approach to capital allocation may be better for shareholders, we appreciate the company’s cautious approach. Though earnings would fall because of the firm’s asset-based fee model, we believe SEI would still be profitable in an equity market downturn. We recognize that SEI has delivered strong revenue and profit growth in its investment advisors, institutional investors, and investment managers segments since the financial crisis.

Management has shown a willingness to sacrifice short-term performance for longer-term returns, though generating those longer-term returns is becoming more of a question of if than when in some cases–particularly in the private banks segment. After years of investment spending, segment operating margins continue to disappoint, and no timeline has been announced on when Trust 3000, the firm’s legacy system, will be retired.” – Morningstar

Al West is getting about $14 million per year in dividends (vs a $750,000 salary) from his 13% direct and indirect ownership of the company, which is worth about $975 million.

In other words, he’s extremely well incentivized to do right by income investors, including growing the dividend at a fast clip.

The company’s long-term focus on maximizing customer and shareholder value has made long-term investors very rich.

We consider SEIC’s management quality/dividend culture a 3/3 because of management’s long-term capital allocation track record and a strong dedication to a very strong balance sheet and dependable dividends.

(Source: imgflip)

Ben Graham considered 20 years of uninterrupted dividends a sign of quality, and we consider a 20-year or longer dividend growth streak to thus pass the “Graham standard of excellence.”

(Source: Investor presentation)

Since 1981 SEIC has delivered

Why are we confident that SEIC will continue to remain a great investment over the long-term?

For two reasons. First, the company’s profitability is improving over time.

(Source: YCharts)

SEIC’s profitability is top among its peers, with a 9/10 profitability score from Gurufocus.

(Source: Gurofocus)

Helping deliver that superior profitability is SEIC’s 39% in LSV, a quant-based value-focused asset manager it invested $52 million in 1994.

Today about 25% of pre-tax profits ($152 million) are coming from LSV, representing an annual return on investment of about 200%. LSV’s operating margins are usually over 75%, making this one of the greatest investments any company, in any industry, has made over the past quarter-century.

Here’s how the company compares to its lucrative rivals.

Metric

Industry Percentile

Operating Margin

63

Net Margin

38

Return On Equity

94

Return On Assets

95

Return On Capital

77

Average

73

(Source: Gurufocus)

Normally we only give 3/3 business model scores to companies with average profitability in the top 25% of its industry.

SEIC’s profitability is currently being hurt by pandemic effects reducing both operating and net margins, as well as returns on capital.

(Source: Gurufocus)

However, management expects profitability to improve once the pandemic is over, and its current return on capital (pre-tax profit/operating capital) is still 242% based on Q2 results.

That’s in the top 23% of its industry and its 13-year median ROC, which is Joel Greenblatt’s gold standard proxy for quality and moatiness, is 358%.

In other words, SEIC is one of the most profitable companies in this lucrative industry and one of the most profitable in the world outside of this pandemic.

Here’s what six analysts who cover this company, and collectively know it better than anyone other than management, expect from SEIC in the future.

SEIC Growth Profile

  • FactSet consensus growth forecast through 2022: 3.6% CAGR (due to very bad 2020)

  • FactSet long-term growth forecast: 12.0% CAGR (1 analyst)

  • Ycharts long-term growth consensus: 12.0% CAGR

  • Reuters’ five-year growth consensus (all six analysts): 12.0% CAGR

  • historical growth rate: 3% to 17% CAGR over the last 20 years

SEIC Medium-Term Growth Estimates

Metric

2020 Growth Consensus

2021 Growth Consensus

2022 Growth Consensus

Dividend (YOY)

6%

4%

-1%

EPS

-10%

15%

5%

Free cash flow

-17%

4%

3%

EBITDA

15%

10%

32%

EBIT (pre-tax profit)

-3%

12%

3%

(Source: F.A.S.T Graphs, FactSet Research)

We wouldn’t be too worried that SEIC is going to actually cut its dividend in 2022. Not when it will have a 30-year growth streak by then and the CEO and founder is getting paid about $15 million per year in dividends, 6.5x his total compensation package from the company.

Note that while 2020 is expected to be a bad year for SEIC (far less so than many financial companies) earnings and various forms of cash flow growth are expected to recover strongly in the coming years.

Outside of the Great Recession when just one analyst was providing two-year forecasts, SEIC’s historical margin of error for meeting growth forecasts is -20% to the downside and +10% to the upside.

  • 12% CAGR growth consensus (from FactSet, Ycharts, and Reuters’) is actually 9% to 13% CAGR when adjusted for historical margins of error

(Source: F.A.S.T Graphs, FactSet Research)

That lines up with the companies historical growth rates which tend to be in the high single and low to medium double digits.

What does this mean for return potential over the next few years? To answer that first we need to get a reasonable estimate for the historical market-determined fair value earnings multiple.

(Source: F.A.S.T Graphs, FactSet Research)

Outside of bear markets and bubbles SEIC consistently trades between 21 to 23 times earnings.

In the words of Ben Graham, the father of securities analysis and value investing, the market has “weighted the substance” of SEIC and determined its worth about 22 times earnings.

That factors in its risk profile, competitive advantages, management quality, and attractive dividend growth record.

So to estimate five-year total return potential we apply the 21 to 23 market-determined fair value PE range to the 9% to 13% CAGR margin-of error adjusted consensus growth range.

SEIC 5-Year Return Potential Range

(Source: F.A.S.T Graphs, FactSet Research)

If SEIC grows as expected and returns to historical fair value then 13% to 18% CAGR total returns would be expected.

SEIC 2022 Consensus Return Potential

(Source: F.A.S.T Graphs, FactSet Research)

SEIC 2025 Consensus Return Potential

(Source: F.A.S.T Graphs, FactSet Research)

SEIC Probability-Weighted Return Calculator

5-Year Consensus Annualized Total Return Potential

16.0%

Conservative Margin Of Error Adjusted Annualized Total Return Potential

8.16%

Bullish Margin Of Error Adjusted Annualized Total Return Potential

24.16%

Conservative Probability-Weighted Expected Annualized Total Return

4.90%

Bullish Probability-Weighted Expected Annualized Total Return

19.33%

Mid-Range Probability-Weighted Expected Annualized Total Return Potential

12.11%

Ratio vs S&P 500

3.14

(Source: Dividend Kings Investment Decision Tool)

Remember that it can take many years for a company to return to fair value and we can’t know whether a stock will be in a bubble or bear market five years from now.

Peter Lynch, John Templeton, and Howard Marks also observed over the decades that 20% to 40% of the time analysts are wrong about how fast a company will grow.

Applying the appropriate margins of error to the Gordon Dividend Growth Model, we can see that 4% to 20% CAGR total returns are likely from SEIC with 12.1% CAGR being a reasonable expectation.

Now compare SEIC’s potential and expected returns to the overvalued S&P 500.

S&P 500 2022 Consensus Return Potential

(Source: F.A.S.T Graphs, FactSet Research)

S&P 500 2025 Consensus Return Potential

(Source: F.A.S.T Graphs, FactSet Research)

S&P 500 Probability-Weighted Return Calculator

5-Year Consensus Annualized Total Return Potential

5.20%

Conservative Margin Of Error Adjusted Annualized Total Return Potential

2.65%

Bullish Margin Of Error Adjusted Annualized Total Return Potential

7.85%

Conservative Probability-Weighted Expected Annualized Total Return

1.59%

Bullish Probability-Weighted Expected Annualized Total Return

6.28%

Mid-Range Probability-Weighted Expected Annualized Total Return Potential

3.94%

(Source: Dividend Kings Investment Decision Tool)

1% to 7% CAGR returns from the S&P 500 over the next five years is reasonable with 4% CAGR being the mid-range expected return.

That’s about half the market’s historical return, generated by our present high valuations.

SEIC on the other hand, courtesy of being modestly undervalued, represents an 11/11 Super SWAN quality fast-growth stock that conservative investors can safely buy today.

3. Valuation: A Classic Buffett “Wonderful Company At A Fair Price”

The way we value a company is by applying the market-determined historical multiples to fundamentals. These are the valuations that millions of real investors, risking real money, have determined is fair value for a company’s dividends, earnings, and various forms of cash flow.

We line up time periods to coincide with similar periods of growth, regulatory environments, and when pertinent to the business model, interest rates.

SEIC Valuation Matrix

Metric

Historical Fair Value (19-year time frame)

2020

2021

2022

5-Year Average Yield

1.09%

$64

$69

$68

10-Year Median Yield

1.09%

$64

$69

$68

Earnings

21.8

$64

$73

$77

Free Cash Flow

19.0

$51

$53

$54

EBITDA

15.4

$62

$69

$91

EBIT

17.8

$52

$58

$60

Average

$60

$65

$70

(Source: F.A.S.T Graphs, FactSet Research)

There’s an 80% probability that SEIC’s intrinsic value lies within the range of $51 to $64 this year, with $60 being the average historical fair value. We consider that a reasonable estimate of what its consensus fundamentals are worth today.

Quality Score

Meaning

Margin Of Safety Potentially Good Buy

Strong Buy

Very Strong Buy

Ultra-Value Buy

3

Very High Bankruptcy Risk

NA (avoid)

NA (avoid)

NA (avoid)

NA (avoid)

4

Very Poor

NA (avoid)

NA (avoid)

NA (avoid)

NA (avoid)

5

Poor

NA (avoid)

NA (avoid)

NA (avoid)

NA (avoid)

6

Below-Average, Fallen Angels (very speculative)

35%

45%

55%

65%

7

Average

25% to 30%

35% to 40%

45% to 50%

55% to 60%

8

Above-Average

20% to 25%

30% to 35%

40% to 45%

50% to 55%

9

Blue-Chip

15% to 20%

25% to 30%

35% to 40%

45% to 50%

10

SWAN (a higher caliber of Blue-Chip)

10% to 15%

20% to 25%

30% to 35%

40% to 45%

11

Super SWAN (as close to perfect companies as exist)

5% to 10%

15% to 20%

25% to 30%

35% to 40%

We use the following scale to determine a reasonable margin of safety to classify companies based on their quality and risk profiles.

Rating

Margin Of Safety For 11/11 Super SWAN Quality Companies

2020 Price

2021 Price

Potentially Reasonable Buy

0%

$60

$65

Potentially Good Buy

5%

$57

$62

Potentially Strong Buy

15%

$51

$55

Potentially Very Strong Buy

25%

$45

$49

Potentially Ultra-Value Buy

35%

$39

$42

Currently

$51.14

15%

21%

We consider SEIC at a 15% discount to 2020s estimated fair value and a 21% discount to next year’s average historical fair value to be a potentially strong buy for anyone comfortable with its risk profile (see risk section).

4. One Of The Best Growth Stocks You Can Buy In This Overvalued Market

The Dividend Kings Investment Decision Tool applies valuation as well as the three priorities of successful long-term investors to every potential recommendation.

We never buy a company without first running it through this tool to ensure it’s reasonable and prudent for conservative investors.

There are two versions of the tool, one for growth stocks and one for dividend stocks.

If a company’s 13-year median yield is 1.5% or less than it’s treated as a growth stock. Since SEIC’s 13-year median yield is 1.09% it’s run on the growth stock version of the tool.

Valuation: 4/4

Points

Meaning

Color Code In Valuation Tool/Research Terminal

4

Potential Good Buy or better (based on quality and risk profile)

Green

3

Potential reasonable buy (based on quality and risk profile)

Blue

2

Hold (overvalued)

Yellow

1

Potential Sell/Trim (33+% overvalued)

Red

(Source: Dividend Kings Investment Decision Tool)

SEIC gets a 4/4 for being a potentially strong buy.

Preservation Of Capital: 7/7

Points

Meaning

Credit Rating

30-Year Bankruptcy Risk

1

Terrible

CC or lower-rated

70+%

2

Very Poor

CCC-rated company

52% to 65%

3

Poor

B-rated company

25% to 45%

4

Below-Average

BB-rated company

14% to 21%

5

Average

BBB- or BBB rated company

11% to 7.5%

6

Above-Average

BBB+ rated company

5%

7

Excellent

A-rated company or better

2.5% or less

(Source: Dividend Kings Investment Decision Tool)

SEIC’s implied A-credit rating or better earns it a 7/7 preservation of capital score due to its debt-free balance sheet.

The dividend return potential isn’t applicable to growth stocks such as this, but we’ve already seen the very strong probability-weighted expected returns are over 3X that of the S&P 500.

Points

Meaning

5-Year Dividend Return Potential

5-Year Expected Total Return

1

Terrible

less than 0.2X S&P dividend return over 5-years

Probability-Weighted Return (PWR) is less than 0.2X S&P 500 PWR

2

Very Poor

0.2 to 0.4X

0.2 to 0.4X

3

Poor

0.41 to 0.6X

0.41 to 0.6X

4

Below-Average

0.61 to 0.8X S&P

0.61 to 0.8X

5

Average

0.81 to 1X S&P

0.81 to 1X

6

Above-Average

1.01 to 1.25X

1.01 to 1.25X

7

Good

1.26 to 1.5X

1.26 to 1.5X

8

Very Good

1.51 to 1.75X

1.51 to 1.75X

9

Excellent

1.76 to 2X

1.76 to 2X

10

Exceptional

over 2X

over 2X

(Source: Dividend Kings Investment Decision Tool)

SEIC Investment Decision Score

Goal

SEIC

Why

Score

Valuation

Potential strong buy

15% undervalued

4/4

Preservation Of Capital

Excellent

Effective A, AA, or AAA credit rating, 2.5% or less long-term bankruptcy risk

7/7

Return Of Capital

NA

Growth Stock, Token Dividend

NA

Return On Capital

Excellent

12.1% PWR vs 3.9% S&P 500

10/10

Relative Investment Score

100%

Letter Grade

A+ exceptional

S&P

73% = C (market-average)

(Source: Dividend Kings Investment Decision Tool)

Even in this overvalued market, where many growth stocks are trading at outlandish valuations, you can find exceptional opportunities to compound your wealth over time.

SEIC is as close to a perfect growth investment as exists on Wall Street right now, offering excellent safety, attractive valuation, and double-digit growth expectations.

Which is why Dividend Kings and Dividend Sensei opened starter positions in the company this week, and hope to keep building on that position in the coming months.

But before you buy any company it’s important to understand a company’s risk profile to determine whether any blue chip is right for your diversified and prudently risk-managed portfolio.

Risks To Consider (Why SEIC Isn’t For Everyone)

One of the key fundamental risks to be aware of is that SEIC owns 39% of LSV, a quant-based value-focused asset manager founded in 1994.

The main risk in our view is severe outflows from severe underperformance or a shift from value investing. Year to date in 2020, value stocks have meaningfully underperformed the market.” – Morningstar

Value has actually underperformed growth for 12 years now, which is not actually that unusual as far as smart beta strategies go.

There are seven proven smart beta (rules-based) strategies that consistently outperform the market over time.

But the only reason that any strategy keeps working is that it can go through long periods (five to 10 years-plus) of underperformance.

LSV’s heavy value focus means it could eventually see significant fund outflows if the ongoing tech bubble results in clients throwing their hands up in despair and abandoning value investing.

The biggest risk to revenue and earnings for SEI are changes in equity markets.

About 80% of SEI’s revenue is asset-based fees. Assuming a 60/40 split between equity and fixed income implies roughly half of SEI’s revenue is sensitive to equity markets.

In addition, SEI’s minority interest in LSV, a value equity asset manager, is sensitive to equity markets as well. While SEI does have some direct expenses, its profits are still strongly influenced by equity market movements. ” – Morningstar

With 80% of revenue tied to the asset markets, SEIC’s business is naturally cyclical and will not do well in recessionary bear markets.

The leveraged nature of this business also means significant earnings contractions during recessions.

  • 2008: EPS growth -11%

  • 2009: -19%

  • 2020 consensus: -10%

Valuation risk on SEIC is currently modest.

  • 16.7 blended PE right now

  • 21 to 23 historical fair value

  • March bottom: 14.7 PE

  • December 2018 bottom: 14.7 PE

  • 2009 low: 10.0 PE

Just because a company is historically undervalued doesn’t mean it can’t become incredibly undervalued.

Remember how SEIC has delivered 16% CAGR market-smashing returns over the past two decades? Well, those returns have required waiting out periods of very high volatility.

SEIC Can Be A Very Volatile Stock During Recessions

(Source: Ycharts)

Volatility is not a measure of risk…. Risk comes from the nature of certain kinds of businesses. It can be risky to be in some businesses just by the simple economics of the type of business you’re in, and it comes from not knowing what you’re doing.

And if you understand the economics of the business in which you are engaged, and you know the people with whom you’re doing business, and you know the price you pay is sensible, you don’t run any real risk.” –Warren Buffett (emphasis added)

Volatility is only risk to those with improper asset allocation and insufficient risk management.

However, given that 50% of historical investor underperformance is a result of emotional forced selling during market downturns, it’s something that we do have to factor into safe portfolio construction.

(Source: Lance Roberts, Dalbar)

(Source: Dalbar)

Prudent asset allocation avoids 75% of the reasons for an investor’s terrible historical returns over time. 25% of the remaining reason is insufficient savings.

SEIC, Dividend Aristocrats, High-Yield/Low Volatility Stocks, S&P & Bonds During March Panic

(Source: YCharts)

You have to remember that stocks and bonds are actually nothing alike, other than they both generate income.

No dividend stock is a true bond alternative because bonds are primarily owned as a hedge against falling stock prices.

As the popular saying on Wall Street goes, “stocks help us eat well, bonds help us sleep well.”

Since 1945, 92% of years when stocks fell bonds were stable or went up in value.

For the rare times that both stocks and bonds fall (such as late March global liquidity crunch), cash is stable or appreciates in value (up 2% in March panic).

  • Emergency fund (separate from your portfolio) funds immediate unexpected expenses

  • Cash (1 to 3 years worth of expenses not covered by dividends, Social Security or private pensions/annuities) is what you tap next

  • Bonds (2 to 4 years worth of expenses) are what you sell after cash is gone, should a bear market still be underway

  • Stocks generate income to replenish cash and capital gains to grow your portfolio to a size that allows for some form of 4% rule or ideally, living entirely off safe passive income

(Source: Guggenheim Partners, Ned Davis Research)

Pullbacks and corrections have occurred, on average, every six months since 1945 and 2009. They last a very short time, just two months for pullbacks, measured from record high to new record high. Corrections, on average last eight months.

Bear markets last an average of 27 months, and crashes of 40%-plus average 81 months. This is why you need sufficient cash/bonds to avoid becoming a forced seller during such protracted market downturns.

Basically, this is the reason for prudent asset allocation as the core of your portfolio’s risk-management strategy.

Bonds are the lowest volatile asset in the world, which is why they serve as a useful source of stable assets in market downturns.

Think about bonds in terms of protection, not yield. The stock market becomes more important when rates are on the floor but that doesn’t mean you can forsake bonds or cash altogether…

In a negative interest rate world, you have to change the way you think about bonds. Bonds have always acted as a shock absorber to stock market declines but this becomes even more important when the yield is more or less taken out of the equation.

Bonds can provide dry powder to rebalance into the stock market or pay for current expenses when the stock market inevitably goes through a nasty downturn. Bonds keep you in business even if they don’t provide high returns as they have in the past.” – Ben Carlson

If you try to time the market, you are likely to see horrible returns because almost all of the market’s long-term returns are a function of its single best (highest volatility) day gains.

(Source: Dalbar)

(Source: Advisor Perspectives)

According to JPMorgan 80% of the market’s best days come within two weeks of its worst days.

So market timing requires not just avoiding the scary days but guessing when stocks will bottom in the hyper short term.During the March Crash, the Dow was swinging wildly including some mammoth one-day rallies. Good luck trying to guess which days to be in and out of the market during such periods of high uncertainty and extreme fear.

In a moment we’ll show you the safe way to correctly own SEIC, as well as any blue-chips we recommend.

But first, let’s see just how volatile SEIC has been over the decades while generating those 16% CAGR total returns.

(Source: Portfolio Visualizer)

SEIC is a proven market-beating Super SWAN quality dividend champion. But it can be extremely volatile at times. So here’s the right way to own it in your sleep well at night portfolio.

The Right Way To Own SEIC In Your Portfolio

Safe portfolio construction is how you convert a Super SWAN quality company (which only applies to fundamental quality, and has zero to do with volatility) into a SWAN portfolio that can withstand anything the market or economy can throw at it.

We always start out with asset allocation, meaning the mix of stocks/bonds/cash that you own.

WisdomTree and Jeremy Siegel, professor of finance at the University of Pennsylvania’s Wharton School, are emphasizing as they encourage investors to consider alternatives to the traditional 60% stock, 40% bond allocation.

We recommend 75/25 as the equity/fixed-income allocation,” he said, adding that it “would be the best way for those approaching retirement to establish their assets to get enough income and gains so they can maintain spending through retirement.” – CNBC (emphasis added)

So let’s begin our construction of a SWAN retirement portfolio by trying out Professor Siegel’s 75/25 stock/bond allocation. Then let’s stress test it against the second-biggest market crash in US history, the Great Recession.

While every downturn is different:

  • if your risk management and portfolio construction can survive the Financial Crisis

  • And hold up well during the March pandemic crash (fastest bear market in history)

  • Then it’s reasonable to assume you’ll sleep well at night no matter what the economy/market throws at us in the future

Note that for this stress test I’m using

  • (BIL) as a cash equivalent proxy because it existed in January 2008

  • (SPTL) as a long bond proxy for the same reason

  • (VIG) as a dividend blue-chip ETF proxy for the same reason

Today I would not use these ETFs to construct a SWAN portfolio but instead use

  • (SCHO) or (VGSH) as cash equivalent ETFs

  • (SCHD) as a dividend blue-chip ETF

  • (EDV) as a long bond ETF

The three ETFs I’m using were selected because it allows us to backtest to January 2008, the start of the Financial Crisis.

How did this portfolio do during the second worst market crash in US history, during which SEIC fell 63%?

(Source: Portfolio Visualizer)

The goals of a 75/25 portfolio are to offer superior yield and returns without significantly more volatility than a 60/40 stock/bond portfolio.

Which is precisely what this SWAN SEIC portfolio accomplished.

(Source: Portfolio Visualizer)

Note that this portfolio, despite being 15% more in stocks, and 7% in extremely volatile SEIC”

  • Fell about 1% less during a 60/40 portfolio during the March panic

  • Fell 0.5% less during the Great Recession

  • Recovered to record highs in the same amount of time as the 60/40 portfolio

So yes, Professor Siegel’s notion of “75/25 is the new 60/40” can be safely achieved.

But what if you want to achieve merely decent returns with the least possible volatility? What if your goal isn’t maximum returns but matching a 60/40 portfolio with the smoothest possible returns over time?

The Ultimate SEIC SWAN Portfolio

We’ve already seen how dividend growth stocks, small size, quality, and valuation are all proven alpha factors.

The reason we care about those (SEIC combines them all) is that outperformance from our stock portfolio can allow a larger bond/cash allocation, resulting in lower volatility.

That can result in superior negative volatility adjusted excess returns, which is what the Sortino Ratio measures (reward/risk ratio).

Bond returns are likely to be between 0% and 2% CAGR over the next decade and thus a 60/40 portfolio will deliver much lower returns. But for our purposes we want to know how large a bond/cash allocation could investors have had at the start of the Great Recession in order to achieve similar returns to a 60/40 portfolio, but with far less volatility.

(Source: Portfolio Visualizer)

The answer is 50/50 stocks/bonds, with 7% allocated to SEIC.

Here’s what the stress test of this portfolio shows.

Similar Returns…But A Far Smoother Ride

(Source: Portfolio Visualizer)

This portfolio achieved 2% lower returns, but 30% lower volatility means 39% better excess total-returns/negative volatility.

How did this ultimate SWAN SEIC portfolio specifically handle the two bear markets we’ve faced over 12 years?

(Source: Portfolio Visualizer)

This portfolio is 20% more bonds that a 60/40 yet fell 54% less during the March panic.

It also fell 39% less during the Great Recession, recovering record highs seven months faster.

Those seven months could have meant the difference between selling stocks at a loss or not.

What if we use my preferred ETFs?

  • EDV instead of SPTL

  • SCHO instead of BIL

  • SCHD instead of VIG

Then we can only stress test back to 2012, but we can still see how this portfolio would have performed during the corrections and one bear market we’ve had over eight years.

(Source: Portfolio Visualizer)

Same Destination But A Smoother Ride

(Source: Portfolio Visualizer)

This is what good risk-management and prudent safe portfolio construction look like.

And this is how it allows conservative income investors to sleep well at night.

(Source: Portfolio Visualizer)

This portfolio, consisting of just three ETFs and one Super SWAN, hasn’t suffered a correction in eight years.

It fell just 5.2% during the March panic vs 12.3% for a 60/40 portfolio and 5.7% for the original 50/50 SWAN SEIC portfolio. Why?

The longer duration of the bond/cash allocation is why the largest peak decline was in 2018 when interest rates shot up over worries the economy was overheating and inflation would be rising.

That’s the downside of a more rate sensitive portfolio and it’s something to keep in mind when selecting your cash/bond allocation.

Hopefully, these three examples of how to construct a well-diversified and prudently risk-managed portfolio, with stress testing during the last two recessions and numerous corrections, show you how to better think about your financial goals and risk-management strategy.

No Super SWAN stock on its own is going to let you sleep well at night if your overall portfolio isn’t constructed using sound risk-management principles.

Bottom Line: SEIC Is One Of The Best Growth Stocks Retirees Can Buy In This Irrational Market Bubble

The market is insane by rational standards. Popular growth stocks are trading at valuations that defy anything that fundamentals can justify.

Super SWAN Dividend Champion WST Is 191% Overvalued

(Source: F.A.S.T Graphs, FactSet Research)

But just because the market is acting stupid in the aggregate doesn’t mean that we shouldn’t strive for “consistently not stupid” decisions.

(Source: Imgflip)

In a sea of overvalued growth stocks, you can always find top quality deals, if you just know where to look.

SEI Investments offers a potent combination of

  • Objectively super quality

  • A fortress balance sheet with zero debt and a relative mountain of cash

  • An exceptional management team led by the founder CEO who owns 13% of the company

  • An impressive 29-year dividend growth streak indicating that this token dividend is dependable and will eventually grow into a substantial income stream

  • An attractive valuation, 15% discount to historical fair value

  • 12% CAGR probability-weighted expected returns which are more than triple the return expectations of the wildly overvalued S&P 500

Today SEIC represents a potentially 100% A+ exceptional growth stock investment for anyone who is comfortable with its risk-profile and owns it within a diversified and prudently risk-managed portfolio.

Dividend Kings and my retirement portfolio have bought SEIC once, and look forward to hopefully building on that starter position in the coming weeks.

Author’s note: Brad Thomas is a Wall Street writer, which means he’s not always right with his predictions or recommendations. Since that also applies to his grammar, please excuse any typos you may find. Also, this article is free: Written and distributed only to assist in research while providing a forum for second-level thinking.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Dividend Sensei owns shares in SEIC.

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