By hoarding capital, Raymond James Financial Inc. may be leaving itself exposed to an activist investor seeking to boost the company's stock price, according to one securities analyst.
In a report titled “Conservatism Leaves It Open to Activism,” Nomura Securities International Inc. analyst Steven Chubak notes that Raymond James' capital and liquidity levels exceed regulatory minimums by more than two times, implying the firm has plenty of excess cash to put to work.
“With activist firepower continuing to build, we see RJF as more susceptible,” according to Mr. Chubak's note, which was published on Friday. “While it does not check many of the traditional activist boxes ... we believe (Raymond James') conservative approach to capital deployment leaves it exposed.”
(More: Raymond James in talks to buy Deutsche Bank's private-client brokerage)
“Recent investor discussions indicate growing reluctance to ascribe value to (Raymond James') excess capital given management's conservative deployment tack,” wrote Mr. Chubak.
While RJF shares have performed well over the past decade, more recently they have lagged, noted Mr. Chubak. “Some investors ascribe the underperformance to management's overly conservative approach to capital management which has dampened (earnings per share) growth.”
Indeed, Raymond James has sufficient capacity to add $17 billion of potential earnings assets at its bank division while keeping in compliance with regulatory minimums, according to Mr. Chubak.
A spokesman for Raymond James, Steve Hollister, said the firm had no comment when asked about the Nomura report.
Mr. Chubak's analysis of Raymond James comes just as activist investors are taking aim at financial services companies and brokerage firms.
Billionaire investor Carl Icahn said on Monday that he may seek to shake up leadership at American International Group Inc. after CEO Peter Hancock rebuffed his plan to split the insurer into three companies, according to Bloomberg News.
With the giant insurer facing pressure from Mr. Icahn, management of AIG Advisor Group, a network of 5,000 registered reps and investment advisers,
acknowledged last week that it was up for sale.
And in September, activist hedge fund investor Marcato Capital Management
took a 6.3% equity stake in LPL Financial, with more than 14,000 advisers, claiming that LPL's shares were undervalued.
Mr. Chubak has a “buy” rating on Raymond James, which has more than 6,000 registered reps and advisers across its multiple channels. His target price for the stock is $65 per share; on Friday, Raymond James shares closed at almost $56.
