Dividends aren't guaranteed. These payouts are usually at the discretion of the board of directors, so even when a high yield is enticing, it could be short-lived. It's important to recognize that it can disappear at any time.
That's why investors who are looking for a stock with a juicy yield need to pay attention to the company's ability to keep sending cash to shareholders. AllianceBernstein (AB +2.24%) is one company that offers both a big distribution and some unique advantages that make it one you can count on. Let's dig in and see why income-seeking investors might get excited about this investment-management company.
Image source: Getty Images.
More than meets the eye
AllianceBernstein came into existence as a limited partnership through a merger of equals. One was focused on equities and the other on fixed income. Its largest client is actually the majority owner. Financial services provider Equitable Holdings (EQH +0.88%) owns 65% of the firm and accounts for 19% of the assets under management.
That unusual arrangement actually helps the company and unitholders -- owners of partnerships are not technically shareholders -- in a few important ways. First, it's grandfathered in under tax laws as a private partnership. Therefore, it's not subject to corporate income taxes at a federal or state level.
It does have to pay a few other nominal taxes, but its effective tax rate has remained consistently below 10% since 2016. To maintain this status, the firm can't enter into any line of business that's considered outside of providing research and investment-management services. That keeps it focused in its area of expertise.
Another advantage is its access to capital. With Equitable Holdings as majority owner, AllianceBernstein has an in-house large customer for new ventures. Equitable has invested more than $1 billion in previous funds, and the relationship provides stability for assets that are illiquid -- not able to be sold easily. Further, the firm has a low-cost, $900 million line of credit that it can draw down, if needed. As the spring of 2020 proved, access to low-cost credit may become necessary with little warning.
The final advantage is for yield seekers. Because of its structure, AllianceBernstein is required to pay out all available cash flow to unitholders. That's helped it outperform the S&P 500 index on a total-return basis -- price gains plus distributions -- even over the past five years when stocks posted historically outsized gains.
AB Total Return Level data by YCharts.
A three-pronged approach to increasing profitability
The firm has delivered that performance primarily by pulling three levers: increasing assets under management (AUM), gaining traction in higher-fee investment areas, and executing cost reductions.
In terms of AUM, it's been compounding 8% annually since 2016. Within those assets, the percentage of actively managed equities (portfolios focused on certain geographies or strategies) and alternatives (like hedge funds, private equity, and real estate) has grown from 50% to 58.4%. Those are higher-fee funds, so each dollar managed generates more revenue. AllianceBernstein doesn't let the added revenue change its thrifty ways.
The company has a culture of cost-cutting and is demonstrating it in a high-profile move. It's shifting its corporate headquarters from Manhattan to Nashville, which is going to save at least $75 million per year by 2025. It's also driven compensation as a percentage of revenue down over the past decade. That number has dropped from over 50% between 2011 and 2014 to just under 48% in 2020. That's boosted the adjusted operating margin about 20% since 2016, from 25.2% up to to 30.1%.
A not-so-simple proposition
The somewhat complex ownership structure adds one other twist to an investment in AllianceBernstein. Although the current yield of nearly 7% is enticing, unitholders will have to report their share of the company's income on their own tax returns. It may be a hassle, but just requires a little math and some planning ahead.
Beyond that complication, the investment is straightforward: a growing global investment-management company with a stellar reputation, paying out everything it earns to unitholders. That commitment, along with its history of compounding AUM and attention to controlling costs, make AllianceBernstein a high-dividend stock you can trust.
