Is The Carlyle Group a Quality Dividend Play?

This column originally appeared exclusively first for Stock Investor Cheat Sheet premium subscribers on February 6th and has been updated to reflect current data changes.

With shares of The Carlyle Group (NYSE:CG) trading at around $30.20, is CG an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

The Carlyle Group operates in four segments: Corporate Private Equity, Real Assets, Global Market Strategies, and Solutions. It has 113 distinct funds, 67 fund of funds vehicles, and it operates in 11 core industries in six continents. It has 33 offices and 1,400 employees. In total, it manages $170 billion. Only a firm with a superb track record has the potential to attract and manage that kind of money.

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The Carlyle Group uses four pillars to drive value in companies and assets it invests in, which are:

  • Global Scale & Presence
  • Deep Industry Expertise
  • Extensive Network of Operating Executives
  • Wealth of Investment Portfolio Data

The Carlyle Group has delivered impressive results for many years, but where does it all begin? According to Glassdoor.com, employees rate their employer a 3.1 of 5. An above average 58 percent of employees would recommend the company to a friend, and an impressive 83 percent of employees approve of CEO William E. Conway, Jr. All in all, the company culture is strong, which is an excellent sign.

Of course, the biggest selling point for investors is the generous yield, which is currently 10.60 percent. These types of yields are somewhat common throughout the industry, but there is something that makes The Carlyle Group different, which is superb debt management. This will allow The Carlyle Group to weather economic storms better than its peers, and it increases the likelihood of the dividend remaining intact.

In regards to recent news, The Carlyle Group is looking to expand its $28 billion energy business. The Carlyle Group has added a six-person international energy investment team to achieve this goal. Its leader will be the experienced Marcel van Poecke, who stated, “This is a remarkable opportunity to combine my team’s international oil and gas investing experience — particularly in Europe and Africa — with Carlyle’s established energy platform. With global energy demands inexorably on the rise, we believe we are well positioned to invest and create value for Carlyle’s investors.”

David Rubenstein, Co-CEO of The Carlyle Group, stated, “Energy, and particularly carbon-related energy, is the single most attractive global area in which to invest today. There is a revolution going on in the U.S. and a need for energy around the world as economies in the emerging markets grow.”

Now let’s take a look at some numbers. The chart below compares fundamentals for The Carlyle Group, The Blackstone Group L.P. (NYSE:BX), and Kohlberg Kravis Roberts & Co. (NYSE:KKR).

CG

BX

KKR

Trailing P/E

72.95

37.02

9.70

Forward P/E

8.75

8.01

8.63

Profit   Margin

0.68%

7.76%

6.42%

ROE

19.45%

N/A

17.49%

Operating Cash Flow

$2.03 Billion

 N/A

  $7.35 Billion

Dividend Yield

10.60%

5.40%

5.10%

Short Position

1.00%

1.80%

0.60%

 

Let’s take a look at some more important numbers prior to forming an opinion on this stock…

E = Equity to Debt Ratio Is Normal  

The debt-to-equity ratio for The Carlyle Group is weaker than the industry average of 0.50, but it still qualifies as normal.

Debt-To-Equity

Cash

Long-Term Debt

CG

1.10

$2.28 Billion

$14.88 Billion

BX

1.18

$1.06 Billion

$13.22 Billion

KKR

0.04

$1.72 Billion

$1.73 Billion

 

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T = Technicals Are Strong   

The Carlyle Group has been a strong performer since its IPO. It hasn’t performed as well as its peers year-to-date, but it offers the highest yield.

1 Month

Year-To-Date

1 Year

3 Year

CG

-1.66%

18.89%

43.82%

N/A

BX

9.22%

46.14%

84.72%

107.0%

KKR

6.95%

43.21%

72.07%

N/A

 

At $30.20, The Carlyle Group is trading below its 50-day SMA and 100-day SMA, but above its 200-day SMA.

50-Day   SMA

31.46

100-Day   SMA

30.45

200-Day   SMA

27.96

 

E = Earnings Have Been Strong               

Revenue has consistently improved on an annual basis, and the quarterly numbers below indicate impressive earnings growth on a sequential basis.

2008

2009

2010

2011

2012

Revenue   ($)in   billions

N/A

1.32

2.80

2.85

2.97

Diluted   EPS ($)

N/A

N/A

N/A

N/A

0.41

 

 

12/2011

3/2012

6/2012

9/2012

12/2012

Revenue   ($)in   millions

831.80

1.11B

248.40

858.50

755.30

Diluted   EPS ($)

N/A

N/A

-0.26

0.40

2.33

 

Now let’s take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Might Support the Industry

The Carlyle Group is excited about energy right now. Industry experts expect global energy demand to increase over the next few years, which is expected to be driven by economic growth. Industry experts also expect the biggest growth areas to be Europe, Africa, the Americas, and Asia.

While this is a possibility, perhaps industry experts are a bit overambitious. The biggest risk for the industry is deflation, which is a realistic possibility in the coming years. The good news for The Carlyle Group is that it’s highly diversified. Unless the global economy completely collapses, there should be growth somewhere.

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Conclusion

The Carlyle Group is a highly diversified firm with a strong business reputation. It’s likely to treat its shareholders well in the future, and it should be more resilient than peers if the stock market suffers a steep correction. However, this is only relative as the stock isn’t likely to be resilient in weak markets. Generous dividend payments should help ease the pain if this scenario should occur. If the stock market holds its own or continues its ascent, then The Carlyle Group should reward shareholders well via stock appreciation as well as dividends.

The Carlyle Group is an OUTPERFORM, but pay careful attention to global markets. Commodities often offer the earliest hint to approaching danger.

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.

Disclosure: All content posted represents my opinion and views and should never be considered professional advice. You should do your own research and consult with a professional financial advisor before making any investment decisions. I do not have a position in this stock. I am currently short technology, financials, the Russell 2000, and the euro.