Franklin On Watch, Scheduled to Report Earnings on April 30

Shares of Franklin Resources (BEN) are down 25% since March 1, significantly underperforming the S&P 500 during that period and pushing Franklin's dividend yield near an all-time high of 7%.

Since we published our last note on Franklin in February reviewing the firm's $4.5 billion acquisition of Legg Mason, the coronavirus pandemic has taken the world by storm, and financial markets have been hit hard.

Franklin and other asset managers don't do well when the market sinks because management fee revenue is driven by the value of their investments.

It's also possible that the market's elevated volatility has further challenged the performance of Franklin's funds, causing more investors to pull their money out.

Franklin's largest mutual fund is the Franklin Income Fund, which accounts for about 11% of the firm's assets. This fund has trailed its benchmark by about 6% over the past year. Longer-term results aren't much better.

Franklin's second-largest mutual fund, the Templeton Global Bond Fund, represents a little under 4% of its assets under management. Its performance through March is even more sobering.

Fund performance is often a leading indicator of future fund flows, so the market is likely growing concerned that more clients will leave in the year ahead.

At the same time, investors may be questioning whether Franklin overpaid for Legg Mason given current conditions in financial markets, which could accelerate the headwinds facing active managers.

There's a lot we could speculate about, but the reality is that outside of incremental performance concerns with some of Franklin's larger mutual funds, no material news has emerged on Franklin since our last note.

Franklin is scheduled to report earnings on April 30. As we discussed in our last note, we will be watching for "a material change in the combined company's fund performance, net asset outflows, or integration execution."

Depending on what we learn when Franklin reports earnings, a downgrade to the company's Dividend Safety Score is possible.

For now, we are maintaining our Very Safe Dividend Safety Score on Franklin, as the company's dividend continues to look well-covered by cash flow and supported by a healthy balance sheet and strong historical commitment.
 
Regardless, we prefer to invest in companies that have clearer paths to long-term profitable growth. Franklin (and other active managers) don't fit that bill due to their relatively high fees and weak performance compared to index funds, so conservative income investors may want to play elsewhere.