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Stocks for Mom
Alliance Capital Management Holding L.P.

By Chris Rugaber (TMF RFK)
May 9, 2000

Trading at $42 13/16 as of May 8, 2000

Forget all the talk about bubbles, overvalued stocks, and market volatility. There are plenty of good companies out there that are worthy of being brought home to moms, and Alliance Capital Management Holding L.P. (NYSE: AC) is one of them. The company has a dividend yield of 6.1%, a price/earnings ratio of 15, solid profits, and a five-year price appreciation chart that beats the S&P 500.

Alliance is the nation's largest publicly traded asset management firm, with $394 billion in assets under management (AUM) as of March 31, 2000, a 31% increase over the previous year. Alliance manages retirement assets for a large number of public and private employee benefit plans, including 28 of the Fortune 100 companies and 33 of the 50 U.S. states. The company also sells a wide range of mutual funds and manages assets for "high-net worth individuals." Alliance is majority-owned by AXA Financial (NYSE: AXF) , itself a subsidiary of European insurance giant AXA (NYSE: AXA) .

The company is structured a little differently than most. It is set up as a limited partnership instead of a corporation. As a result, it has to distribute all excess income (about 95%) as dividends to shareholders, or "unitholders," as Alliance calls them. This also creates some tax complexity, as investors must report the dividends on a Schedule K-1 form that the company sends in March. Even holding the shares in an IRA does not fully shield investors from taxes, though of course individual situations vary.

Generally, companies that pay dividends as high as Alliance's offer less price appreciation than others, yet Alliance is no slouch in the capital-appreciation department, as the chart linked to above shows. In the last five years, Alliance has posted a compound average annual return of 43.8%, with reinvested dividends accounting for about a quarter of that total. Nevertheless, the low trading volume in the stock and the resulting staid behavior of the company's shares make it especially suitable for moms and others who may not be looking for the latest hot stock. Those who are interested in receiving regular income from their investments should consider Alliance as well.

Investing in Alliance does raise one obvious question: Why an asset manager? After all, the company sells a lot of high-priced mutual funds that are about as Wise as mutual funds can get, with lots of loads, fees, and expenses. This is certainly a cause for concern for the Foolish investor. As more and more people learn about investing, hopefully fewer will choose funds with loads and high fees. However, there aren't many signs of that happening anytime soon. Alliance logged a record net U.S. mutual fund sales growth of 88% in the first quarter of this year. However, the company does sell plenty of no-load funds, too, and will almost certainly be able to adapt to any changes that occur in the mutual fund industry.

The most important point about Alliance is that asset management is a great business. Every month, millions of Americans send chunks of their paychecks to 401(k)s, mutual fund accounts, or some other retirement vehicle, and millions of them send money to Alliance. Fees from this growing pile of assets are a pretty reliable source of revenues.

In addition, there are three other trends that help this business: an increase in the number of people who need to save for retirement, due largely to the aging of baby boomers; an increase in the proportion of those people who invest in stocks and mutual funds; and a booming stock market that increases assets under Alliance's management -- and also encourages trend number two.

Presumably as a result of all this, retirement account assets in mutual funds grew dramatically in the 1990s, from $192 billion in 1990 to $1.86 trillion by 1998, according to the Investment Company Institute. This is just one of the markets that Alliance is operating in. The company has also been successfully expanding internationally in recent years, and currently has mutual fund customers in 121 countries.

These trends are clearly reflected in the company's growing AUM and financial results. From 1995 through 1999, the company's AUM jumped 150%, from $147 billion to $368 billion. Last year, the company's revenues increased 41%, net income jumped 53%, and earnings per share (EPS) were up 52%. The company's first quarter earnings for this year included a 53% jump in EPS and a 31% increase in revenues over the previous year. Over the past five years, the company's sales have grown at a 19.9% compound annual rate and its EPS has grown at a 24.4% annual rate. And as the company's income grows, dividends grow as well. The company paid out $1.62 per unit (or share) in 1998 and $2.49 in 1999, an increase of 54%.

Alliance is a favorite of several Fools over at the l'union fait la force discussion board, which is where interested readers may want to head for more information. There is an Alliance board as well. In short, if you want to recommend a stock for your mom without sending her on a wild Nasdaq ride, this company is worth considering.

Alliance Company Information:
Trades on the NYSE under symbol AC
Website: www.alliancecapital.com

Next: 1999 Stocks for Mom Results »

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