Janus Henderson: Cash Is King

Elevator Pitch

I rate Janus Henderson Group plc (NYSE:JHG) stock as a Buy. Previously, I highlighted the "value creation levers" for Janus Henderson like "growing alternatives' AUM" and "expanding in non-US markets" in my April 27, 2023 article.

With this latest write-up, I touch on Janus Henderson's cash rich balance sheet and highlight how the company could potentially allocate capital in a way that creates value for shareholders. Cash is king in a "higher for longer" rate environment, and companies with substantial financial strength like JHG can create tremendous value by utilizing cash in a value-accretive manner. As such, I still have a Buy rating for JHG, in consideration of the value creation potential associated with the company's capital investment and return initiatives.

Huge Cash Pile

As of the end of 1H 2023, Janus Henderson had cash and investments amounting to $1,350 million on the company's books as indicated in its Q2 2023 results presentation slides. This means that JHG's cash and investments are equivalent to 35% of its market capitalization.

Even if one takes into consideration JHG's debt of around $306 million as of June 30, 2023, Janus Henderson's net cash is still a significant $1,044 million, which is roughly 27% of the stock's market capitalization. It would be an understatement to describe Janus Henderson's financial position as robust.

Janus Henderson's cash pile is very likely to continue growing in the foreseeable future. Based on financial estimates sourced from S&P Capital IQ, the sell-side analysts forecast that JHG will generate yearly free cash flow in the $250-$400 million range for the next five years.

At its Q2 2023 earnings briefing, Janus Henderson's Chief Financial Officer Roger Thompson acknowledged that it has "a strong balance sheet", but he emphasized that "we're not here to hold cash." The CFO's comments sent a clear message that JHG has plans to use the huge cash pile that it has.

In the next two sections of the article, I outline how JHG can enhance shareholder value by allocating capital wisely.

Mergers & Acquisitions

JHG's CEO Ali Dibadj stressed at the company's most recent quarterly results call that it has "been very active in the M&A landscape." In June this year, Janus Henderson published a media release revealing that it will "hold a minority stake" in Privacore "with a defined path to control" as part of a "new joint venture" to "accelerate growth across private alternatives." In this press release, JHG refers to Privacore as "an open-architecture distributor and trusted consultant for alternative investment products."

In my prior April update on JHG, I noted that Janus Henderson "hasn't been able to capitalize on the good performance of its Alternatives capability and Diversified Alternatives business", as "Alternatives only accounted for 4% of Janus Henderson's total AUM" as of December 31, 2022. At the Morgan Stanley (MS) U.S. Financials, Payments, and CRE Conference on June 12, 2023, JHG mentioned that the investment in Privacore and the establishment of a joint venture were done to capitalize on "the democratization of private alternatives into the retail channel."

JHG's Key Motivations For Acquiring An Equity Interest In Privacore

The Privacore investment is an example of how JHG can enhance its distribution capabilities in specific channels (e.g. High Net Worth Individuals) via M&A. On the flip side, Janus Henderson also has the choice of investing or acquiring companies with products that can be distributed via the company's extensive global distribution network.

In its FY 2022 10-K filing, JHG highlighted that it had 239, 241, and 67 employees responsible for fund distribution in North America, EMEA & Latin America, and Asia Pacific, respectively at the end of last year. Therefore, companies acquired by Janus Henderson can expect the distribution reach of their products to widen considerably.

Shareholder Capital Return

It would be worrying if Janus Henderson focuses solely on acquisitions and investments as the means of utilizing its excess capital, as this increases the risk of engaging in poor M&A deals that don't create value.

As such, it is encouraging to know that JHG has a good track record of shareholder capital return, and this makes it likely that the company will have buybacks and dividends as part of its capital allocation options.

Between the third quarter of 2018 and the second quarter of 2023, Janus Henderson's cumulative share repurchases have driven a -17.3% decline in the company's number of shares outstanding as indicated in its Q2 earnings presentation.

Separately, Janus Henderson, established in May 2017 with the combination of Janus Capital and Henderson Group, has consistently paid out dividends every quarter starting in Q2 2017.

JHG's CFO noted at the company's Q2 results briefing that "if we don't have a better use of it (cash pile), we will think about returning it." Therefore, it will be realistic to expect Janus Henderson to continue with its quarterly dividend payout, and also potentially execute on buybacks in an opportunistic fashion if its shares are sold down unfairly.

Concluding Thoughts

Janus Henderson has a significant amount of cash on its balance sheet. I think that JHG knows how to allocate capital wisely, which supports my Buy rating for the stock.

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