Federated Rides on Acquisitions and AUM Growth, High Costs Ail

Core Viewpoint - Federated Hermes, Inc. is experiencing growth in assets under management (AUM) through strategic acquisitions in the money market sector, but rising expenses and reliance on net investment advisory fees present challenges [1][3][7]. Group 1: AUM Growth and Strategic Acquisitions - The acquisition of money market assets indicates Federated's strong position in the money market business, with significant growth in money market AUM in the first half of 2024 [3]. - The company has engaged in strategic deals, including the buyout of C.W. Henderson and Associates, Inc., which enhances its separately managed account business [4]. - Federated's average AUM has shown a five-year compound annual growth rate (CAGR) of 11.9% as of 2023, with continued growth expected in the first half of 2024 [4]. Group 2: Capital Distribution Activities - Federated's capital distribution activities are positive, with a share repurchase program authorized for up to five million shares in June 2022 and an additional five million shares in October 2023 [5]. - The company has consistently paid dividends since its IPO in 1998, increasing its quarterly dividend by 10.7% to 31 cents per share in April 2024 [6]. - As of June 30, 2024, Federated's long-term debt was $348 million, and cash and other investments totaled $452.95 million, indicating a strong liquidity position [6]. Group 3: Challenges to Growth - Rising expenses are a concern for Federated, with expectations of increased distribution costs and new hires potentially escalating the cost base [7]. - Management anticipates higher advertising and promotion costs in the second half of 2024 compared to the first half, which may pressure profitability [7]. - Net investment advisory fees accounted for 66.2% of total revenues as of June 30, 2024, making the company vulnerable to fluctuations in the fair value of securities and fund redemptions [8].