I want to share my thoughts on an Morgan Stanley (NYSE:MS). As someone who focuses on dividend growth stocks, I always keep an eye out for income-producing assets, particularly stocks that offer attractive value.

Now, I know the financial sector can be a bit daunting, given the suspicions surrounding financial institutions. But here’s why I believe Morgan Stanley is worth considering. They are a stable, highly regulated financial institution, and that alone can bring some peace of mind. Plus, they have been making some strategic moves that make them even more appealing.

Let’s dive into the fundamentals. Over the past decade, Morgan Stanley has seen impressive revenue growth, increasing by 66%. Even though they experienced a slight decline after their peak year in 2021 (as most investment banks did), their long-term growth remains steady. They’ve been reaching more clients and managing more assets through strategic acquisitions like Eaton Vance and E-Trade, which have allowed them to offer a wider range of services to the mainstream population. Analysts expect Morgan Stanley to continue growing sales at an annual rate of around 4% in the medium term.

What about earnings per share (EPS)? Well, Morgan Stanley has seen even faster growth in this area, with EPS increasing by a whopping 266% over the past decade. Their expansion of assets under management (AUM) without significant cost increases, along with improved margins and aggressive share buybacks, has been key to this growth. Analysts predict that Morgan Stanley will continue to grow EPS at an annual rate of approximately 9.5% in the medium term.

Now, let’s talk dividends. Morgan Stanley recently announced a dividend increase of 9.7% following the 2023 stress tests. This will bring the dividend yield close to an attractive 4%, making it a compelling choice for dividend-seeking investors. Despite a decline in EPS from their 2021 peak, the payout ratio remains between 50% and 60%, indicating that the dividend is well-supported. It’s worth noting that Morgan Stanley hasn’t reduced its dividend since the financial crisis, and they are taking a more conservative approach to ensure its sustainability.

But wait, there’s more! Morgan Stanley has also been aggressively buying back its shares over the past decade. In fact, they plan to buy back an additional $20 billion worth of stock following the 2023 stress test. They’ve managed to reduce the number of outstanding shares by 15% during this period, even after issuing shares to fund their E-Trade acquisition. This focus on buybacks can be highly efficient, especially when the share price is low.

Now, let’s talk valuation. When it comes to financial institutions, the price-to-book ratio (P/B ratio) is a useful metric. Currently, Morgan Stanley is trading at 1.5 times its book value, which aligns with its valuation since the recession caused by the pandemic. While the valuation seems reasonable compared to the last 30 months, it’s important to note that some peers, like Goldman Sachs, trade at one times their book value.

When we look at the price-to-earnings (P/E) ratio, the graph from Fast Graphs shows that Morgan Stanley is fairly valued. Over the past decade, the average P/E ratio was 12.8, and the current one stands at 13.5 when using the 2023 EPS forecasts. The forecasted growth rate of 9.5% is higher than the growth rate observed over the last two decades (5%). This suggests that the stock is fairly valued, with a potential margin of safety due to the faster growth rate combined with a similar valuation.

Now, let’s move on to the exciting growth opportunities for Morgan Stanley. They

have been focusing on building a funnel that attracts younger investors and accompanies them as they grow their wealth. By strategically investing in wealth and investment management, Morgan Stanley is becoming a more diversified institution with a broader client base. They offer mainstream investors their E-Trade platform, providing retirement solutions through workplaces. Once these clients “graduate” and have enough capital for wealth management services, Morgan Stanley can easily attract them. They’ve shed non-core businesses to focus on this funnel, strengthening their position in the market.

On the risk side, competition is a factor to consider. The investment banking realm is highly populated with giants like Goldman Sachs and JPMorgan, while the investment and wealth management sector is also fiercely competitive. Morgan Stanley operates in a field where every segment is highly contested.

Additionally, the current economic slowdown poses another risk. We’ve already seen a decrease in mergers and acquisitions activity, which directly impacted Morgan Stanley’s investment banking segment revenues in Q1 2023. If this slowdown were to turn into a recession, we could see even more significant drops in Morgan Stanley’s revenues and EPS. During a recession, the stock market tends to plunge, and investors may become less active, resulting in fewer fees for the company and a decline in assets under management.

To sum it all up, Morgan Stanley is a blue-chip company that has managed to achieve remarkable growth in both top and bottom lines, while also rewarding shareholders with dividends and buybacks. Their strategic focus on wealth management and the funnel they’re building presents exciting growth opportunities. Of course, there are risks, primarily due to the competitive landscape and the potential impact of an economic slowdown. However, I believe Morgan Stanley is well-positioned to navigate these challenges and continue to offer double-digit returns in the medium term.

Based on my analysis, I rate Morgan Stanley as a BUY, especially for dividend growth investors. So, if you’re looking for a solid investment opportunity, it’s definitely worth considering.