Shortly after the opening bell, we will be initiating a position in Morgan Stanley (MS) , buying 500 shares at a bid/ask of $89.84/90.15. Following the trade, MS will represent 1.15% of the portfolio.
We are calling up Morgan Stanley from the bullpen this morning with the market poised to open lower and financials set to decline alongside a dip in Treasury yields.
Our bullish thesis on MS is mainly predicated on the strategic transformation management has been executing on over the past few years. Their mission is to create three world-class businesses of scale: Institutional Securities, Wealth Management, and Investment Management.
Morgan Stanley's push into the latter two businesses was recently enhanced by the acquisitions of E-Trade (for Wealth Management) and Eaton Vance (Investment Management). What has been so great about these two deals is how it increases the bank's exposure to fee-based and recurring revenue streams, making Morgan Stanley less dependent on volatile business lines and interest rates. In a recent note by Jefferies, the analysts forecasted WM and IM fees as a percentage of Morgan Stanley's overall revenues will grow to roughly 60% in the fourth quarter of 2022, up from about 46% in the first quarter of 2021. We believe Morgan Stanley's price-to-earnings multiple should expand (or hold its recent higher levels at minimum) as the integration of these two acquisitions continues and fee-based recurring revenues become the majority.
In addition to our positive outlook on Morgan Stanley's business plans, we find the stock to be attractive from a capital return perspective too. The bank was the clear cut winner from this year's round of annual stress tests, which allowed it to return a significant amount of excess capital back to shareholders. Morgan Stanley increased its quarterly dividend payment to $0.70. This new payment implies a dividend yield of 3.10% as of Friday's close. In addition to the big dividend boost, Morgan Stanley announced plans to repurchase up to $12 billion of stock over the next four quarters. We expect management will be aggressive buyers on any dip.
We remain bullish on MS over the long-term and like the entry point here with the new dividend yield north of 3%, but we also recognize how there is some general uncertainty this week with the bank set to report second-quarter earnings this Thursday. Our strategy into the print is to buy a little ahead of the quarter and to leave plenty of room to buy more after the report just in case the stock takes a dip on earnings.
We are initiating the position with a price target of $100, representing roughly 14x consensus 2022 earnings per share estimates, or roughly 2.4x consensus 2022 tangible book value estimates. We believe Morgan Stanley's premium over tangible book will be maintained as the bank delivers return on tangible common equity in the high teens percent.