8/16/2019 Franklin Resources: Too Cheap to Ignore - Barron's

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management, and control by the founding Johnson family. The family’s stake is held mostly by brothers Rupert Johnson, 75, and Charles

Johnson, 82, who together own 34% of the shares. This prevents an unfriendly bid for the company and deters activist investors who otherwise

might target it. Franklin’s CEO is Greg Johnson, 54, Charles’ son.

Indeed, the shares have proved to be a value trap amid disappointing earnings and continued outflows. Barron’ s wrote positively on the company

last year when the stock traded around $56 (“Will an Activist Ring Franklin’s Bell?” June 16, 2014).

The refrain from analysts is that Franklin looks inexpensive, but that there is “no compelling reason to own the stock,” and “no catalysts,” given

ongoing outflows.

Yet its depressed valuation could prove to be a catalyst. Management might get more aggressivewith stock buybacks and lift the shares’ stingy 1.5% yield. (Franklin occasionally issues special

dividends, including a 50-cent payout last year, which lifted the yield to nearly 3%.) And an activist

could surface and urge Franklin to more aggressively return cash to shareholders.

Other catalysts that could lift the stock to $50 or higher are improved fund flows, better investment

performance, or a market rally.

WITH $855 BILLION in assets under management (AUM), Franklin is one of the top distributors of 

mutual funds through full-service brokers, and it has one of the best international franchises among

U.S.-based asset managers, with a third of its AUM coming from foreign investors.

This year’s outflows have been triggered, in part, by the poor performance of the $65 billion Templeton Global Bond (TPINX) and $88 billion

Franklin Income (FKINX) funds, which have been trailing most of their peers over the past 12 months.

Franklin had $11 billion of outflows in the June quarter, versus expectations of $3 billion to $4 billion, and that followed $5.3 billion of outflows in

the March quarter. Its assets under management are down 6% since June 2014.

Franklin’s managers seem to be exposed to many of this year’s investment trouble spots, including

Ukraine, Puerto Rico, nondollar debt, energy stocks, and the now-distressed debt of leveraged

energy companies. Franklin Income was down 5.6% for the year through August, putting it about four 

percentage points behind the average fund in its category, according to Morningstar. Templeton

Global Bond was off 4.6%.

Franklin also runs a group of municipal-bond funds, the Mutual Series value-oriented equity funds,

and international stock funds headed by emerging-market guru Mark Mobius.

While Franklin’s stock has been a laggard in recent years and flat since 2007, it has had a phenomenal long-term performance under Johnson

family management, rising nearly 100-fold since 1987.

Franklin is going through a tough period, but still has a solid franchise. It can do better for shareholders by distributing more of its huge cash

balance and ample earnings—although much of the cash is overseas, and management has been reluctant to repatriate it and pay the

consequent taxes. Still, there’s no reason to be sitting on almost $10 billion of cash and investments in a capital-light business.

E-mail: editors@barrons.com

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