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Monday, January 26, 2009

* Stock Analysis: Legg Mason, Inc. (LM)

This article originally appeared on The DIV-Net January 19, 2009.

Linked here is a detailed quantitative analysis of Legg Mason, Inc. (LM). Below are some highlights from the above linked analysis:

Company Description: Legg Mason, Inc. is a diversified investment manager serving individual and institutional investors through offices around the United States.

Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:
  1. Avg. High Yield Price
  2. 20-Year DCF Price
  3. Avg. P/E Price
  4. Graham Number
LM is trading at a discount to 1.) and 2.) above. Since LM's tangible book value is not meaningful, a Graham number can not be calculated. If I exclude the high and low valuations and average the remaining two, LM is trading at a 22.8% discount. LM earned a Star in this section since it is trading at a fair value.

Dividend Analytical Data: In this section I consider five factors, see page 2 of the linked PDF for a detailed description:
  1. Rolling 4-yr Div. > 15%
  2. Dividend Growth Rate
  3. Years of Div. Growth
  4. 1-Yr. > 5-Yr Growth
  5. Payout 15% of avg.
LM earned three Stars in this section for 1.), 2.) and 3.) above. Rolling 4-yr Div. > 15% means that dividends grew on average in excess of 15% for each consecutive 4 year period over the last 10 years (1999-2002, 2000-2003, 2001-2004, etc.) I consider this a key metric since dividends will double every 5 years if they grow by 15%. LM has paid a cash dividend to shareholders every year since 1983 and has increased its dividend payments for 27 consecutive years. Last year's dividend payout was 44%, up from 15% in 2007. Since the increase was in excess of 15 points, a Star is deducted, leaving a net of two Stars in this section.

Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:
  1. NPV MMA Diff.
  2. Years to >MMA
LM earned both of the available Stars in this section. The NPV MMA Diff. of the $239,028 is in excess of the $2,500 minimum I look for in a stock that has increased dividends as long as LM has. LM's current yield of 4.64% exceeds the 3.45% estimated 20-year average MMA rate.

Other: LM is a member of the S&P 500, a Dividend Aristocrat and a member of the Broad Dividend Achievers™ Index. The company has a strong market share and boasts an impressive historic investment performance. However, recent under performance in some of LM's flagship funds may have resulted in increased client redemptions. That combined with struggling equity markets, have resulted in sharply lower asset balances. Risks include industry cyclicality, acquisition integration further market declines and poor investment performance.

Conclusion: LM earned one Star in the Fair Value section, earned two Stars in the Dividend Analytical Data section and earned two Stars in the Dividend Income vs. MMA section for a net total of five Stars. This quantitatively ranks LM as a 5 Star-Strong Buy.

Using my D4L-PreScreen.xls model, I determined the share price could increase to $85.88 before CFR's NPV MMA Differential fell to the $3,000 that I like to see. At that price the stock would yield 1.12%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the needed $3,000 NPV MMA Differential, the calculated rate is 0.5%. This dividend growth rate is substantially below the 20.0% used in this analysis.

LM has not increased its dividend since June 2007 and runs the risk of losing its status as a Dividend Aristocrat. Before initiating a position, I would wait and determine LM's dividend policy going forward. LM's buy price is $27.26. For additional information, including LM's dividend history, please refer to its data page.

Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.

Full Disclosure: At the time of this writing, I held no position in LM (0.0% of my Income Portfolio) .

What are your thoughts on LM?

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