Table of Contents
Company profile: major US bank with a focus on investment banking
The last Morgan Stanley quarterly figures from September 2024
Key metrics for the Morgan Stanley stock from the dividend analysis
Bank stocks are not for everyone. But there are now some arguments in their favor. The environment for bank stocks in the US has improved significantly in recent years, particularly as a result of the Trump administration's deregulation policy. Easing regulations and lower capital requirements have given large financial institutions more leeway to increase profits and return capital to shareholders. At the same time, robust economic growth and expansionary monetary policy helped boost earnings in key areas such as investment banking, asset management and proprietary trading. In this environment, Morgan Stanley (ISIN: US6174464486) has emerged as one of the biggest profiteers. In the last five years alone, the share price has risen by 166 percent. More than 40 percent of the share price performance was achieved in the current year.
Source: Morgan Stanley stock price performance, StocksGuide
Today, Morgan Stanley is even America's largest investment bank in terms of capitalization. However, the bank has not only benefited from the regulatory side. Above all, the New Yorkers have consistently developed their business strategy in recent years and concentrated on expanding less volatile and at the same time high-growth business areas such as wealth and investment management. These generate stable, recurring revenues, making Morgan Stanley less vulnerable to short-term fluctuations in the financial markets. At the same time, however, investment banking remains a strong revenue generator, benefiting from the continued demand for mergers, acquisitions and capital market transactions. And it is precisely this area that could spark the imagination with Donald Trump re-elected president. After all, he is a friend of the dismantling of antitrust regulations.
Last but not least, the dividend policy also makes the share attractive: Morgan Stanley not only offers investors an above-average dividend yield. The distributions have also increased significantly in recent years. For investors looking for a mix of growth, stability and continuous income, the stock therefore offers an interesting opportunity to benefit from the long-term potential of one of the world's leading financial institutions. In the current Morgan Stanley equity analysis, we took a closer look at how the major bank is positioned to benefit in the current environment.
The most important information in brief
Morgan Stanley is one of the leading global investment banks and offers a wide range of financial services. Its business model is divided into three main segments: Institutional Securities, Wealth Management and Investment Management. Each of these segments addresses specific customer groups and generates revenues through different services and products.
Source: 10K-Form Morgan Stanley 2023
The Institutional Securities segment, for example, is the core of the company and is responsible for 43 percent of revenues in 2023. It targets institutional clients such as large corporations, governments, hedge funds and pension funds. A central role is played by investment banking, which advises companies on mergers, acquisitions, divestitures and restructurings. Another focus is on helping clients raise capital by issuing stocks and bonds. In addition, Morgan Stanley offers services in trading equities, bonds, commodities and derivatives. These trading activities generate income through market making, arbitrage and the provision of liquidity. Morgan Stanley also offers institutional investors services such as securities lending and risk management through its prime brokerage business.
The second largest segment is Wealth Management. It has recently become the segment with the highest revenues, accounting for 48 percent of revenues in 2023, due to the chronic weakness of the Institutional Securities segment and strong acquisitions. Wealth Management is primarily aimed at high-net-worth individuals, families and smaller institutions. Morgan Stanley offers comprehensive financial services here, ranging from investment advice and asset management to customized financial planning. In contrast to the highly transaction-oriented business of the Institutional Securities segment, the focus here is on stable, recurring revenues from management fees and commissions. Wealth Management also benefits from a technological infrastructure that enables clients to manage their assets digitally, as well as from a large number of financial advisors who ensure personalized service.
Finally, the third and smallest segment, Investment Management, focuses on asset management for institutional and private clients. The business area contributed around 10 percent of total revenue in the 2023 financial year, but, similar to Institutional Securities, recorded a decline in revenue and profits. The focus is on managing investment funds, alternative investments and individual mandates. Morgan Stanley invests for them in a range of asset classes, including equities, fixed-income securities, real estate and private equity.
Source: Morgan Stanley 2023 10K Form
The Americas play a significant role, accounting for 77 percent of revenues. This share has actually increased over the years. Europe and Asia play only a minor role, each accounting for just over 10 percent of revenues.
With a market capitalization of 211 billion US dollars, Morgan Stanley is now the largest investment bank in the US, followed by Goldman Sachs and Charles Schwab. If commercial banks are included, Morgan Stanley ranks fifth behind JP Morgan Chase, Bank of America, Wells Fargo and American Express.
Source: Comparison of market capitalizations Peer Morgan Stanley
Morgan Stanley and Goldman Sachs are both leading investment banks with a global reach. However, they differ in their strategic orientation and focus. While Goldman Sachs has traditionally been strongly focused on investment banking and securities trading, Morgan Stanley has diversified its business more in recent years. In particular, wealth management has gained significantly in importance through the acquisitions of Smith Barney and E*TRADE. Morgan Stanley is therefore relying more on stable, fee-based income from asset management. This has recently paid off in the form of a higher valuation. By contrast, Goldman Sachs is more active in trading equities, bonds, commodities and derivatives and generates a larger share of its revenues from proprietary trading and short-term market activities. In addition, Goldman Sachs has traditionally been better positioned in advising companies on major mergers and acquisitions. In terms of revenues, it remains the market leader in this area, ahead of Morgan Stanley. At the same time, the bank founded by Goldman and Sachs has expanded its offering of alternative investments such as private equity and hedge funds in recent years.
But there are other differences as well: Morgan Stanley tends to appeal to a broader range of clients, including high-net-worth individuals and smaller institutions, with its extensive wealth management services. Goldman Sachs has traditionally targeted its services more at institutional investors, governments and large corporations. In recent years, however, Goldman Sachs has also started to hunt in its biggest rival's territory – with Marcus, a digital platform for private clients.
Charles Schwab, on the other hand, is fundamentally different from Morgan Stanley and Goldman Sachs in that it focuses more on discount brokerage and the mass market for self-directed private clients. It thus addresses a broader customer base seeking access to low-cost trading platforms, index funds and automated investment advisory services. Charles Schwab's business model is therefore primarily volume-oriented. By contrast, Morgan Stanley generates higher margins by providing personalized advice and customized financial solutions to wealthy clients. Morgan Stanley is also more active in traditional wealth management and personal financial planning, while Charles Schwab relies more on digital and scalable solutions that are optimized for the mass market. Another difference is that Morgan Stanley and Goldman Sachs, as full-service banks, primarily serve institutional and high-net-worth clients. Charles Schwab is a platform operator for self-directed and small investors.
Compared to commercial banks such as Bank of America or JPMorgan Chase, Morgan Stanley is more specialized in investment banking, wealth management and investment management. The two leading commercial banks, for example, have a broader base with their deposit business and generate more income from traditional retail and corporate banking. Their larger branch presence is also striking. They offer a comprehensive range of retail banking services, consumer loans and payment transactions. Whether an investment bank like Morgan Stanley or a commercial bank is ultimately the better choice for investors depends on the perspective.
Commercial banks such as JPMorgan Chase or Bank of America offer traditional banking services such as lending, deposit taking and payment transactions. This makes their business model relatively robust and less susceptible to fluctuations in the financial markets. However, they are also heavily dependent on the respective interest rate level. They can quickly come under pressure, especially in low-interest phases. Investment banks such as Morgan Stanley or Goldman Sachs, on the other hand, focus on specialized services such as advising on mergers and acquisitions, supporting capital raising and trading in securities. This business model offers opportunities especially in times of strong or booming financial markets. They can generate high profits through proprietary trading and complex financial products in such market phases. However, their earnings are also significantly more volatile in crises. In economically uncertain times or during market corrections, profits can slump. While commercial banks are often more stable and less risky due to their retail banking business, investment banks offer higher margins and potentially higher profits, but also higher risks.
The risk of fluctuation and thus the formation of reserves is a sensitive topic for banks, because risk buffers reduce profits. However, insufficient risk provision also increases the risk of insolvency or puts the entire industry in jeopardy. Regulations are therefore necessary to prevent financial crises. In the US, they vary greatly depending on the political orientation of the government, depending on whether Democrats or Republicans are in power.
Under a Democratic administration, the financial sector is usually regulated more strictly. Democrats place more emphasis on consumer protection, systemic stability and limiting the risks posed by large financial institutions. For example, in the wake of the 2008 financial crisis, they implemented the Dodd-Frank Act, which introduced stricter capital requirements, tighter supervision of systemically important banks and higher transparency requirements. Democratic administrations tend to strengthen the role of regulatory agencies such as the Securities and Exchange Commission (SEC) and the Federal Reserve and push for new regulations in areas such as cryptocurrencies, environmental, social and governance (ESG) risks, data protection and financial technologies (fintech). The taxation of large banks and financial transactions is also frequently discussed by Democrats as a tool of regulation and redistribution.
Financial regulation tends to be less strict under Republican administrations. Republicans place more emphasis on the personal responsibility of market participants and favor a policy of deregulation to strengthen the competitiveness of banks and stimulate economic growth. During their time in office, they often seek to roll back or relax regulatory measures that they see as hindering the profitability and innovative capacity of the financial sector. Republicans are generally more skeptical of regulatory intervention in the market and advocate lower capital requirements, less stringent stress tests and less supervision of proprietary trading by banks. For example, the Dodd-Frank Act was partially repealed under the Trump administration, particularly for small and medium-sized banks. The result was a crisis in the regional banking sector in 2024. Political changes in the US therefore often have a direct impact on the business strategies and profitability of financial institutions.
But people, especially highly qualified talent, also play a crucial role in the financial sector and are often the most important factor in a bank's success. While banks have large capital resources, advanced technologies and global networks, their competitiveness depends to a large extent on the expertise, skills and networks of their employees. This applies in particular to investment banks such as Morgan Stanley, Goldman Sachs or JPMorgan, but also to large commercial banks, which are increasingly active in specialized business areas that require a great deal of advice.
In areas such as investment banking, asset management and trading, individual employees are often directly responsible for the success of projects or transactions. Top bankers in the areas of mergers and acquisitions or capital market financing not only bring professional expertise, but also a valuable network of customer relationships that can generate millions or even billions in revenue. The loss of such a key person can mean not only a loss of revenue for a bank, but also the loss of customers who follow the banker to a competitor. This also applies to trading and portfolio management. Here, top traders or fund managers can quickly make strategic decisions that generate significant profits or prevent losses. Their ability to quickly identify and respond to market developments makes them a valuable resource for banks and asset managers. Just think of Bill Gross, Peter Lynch, Bert Flossbach or Kurt von Storch. Particularly in volatile markets, individual talents like these can make the difference between success and failure.
In wealth management and private banking, too, advisors play a crucial role. Clients, especially high net worth individuals and institutional investors, place a high value on personal relationships and individual advice. An experienced advisor who has gained the trust of his clients is often indispensable to a bank and difficult to replace. In addition, leaders and top managers play a crucial role in the strategic direction and cultural transformation of banks. CEOs and board members of large banks are not only responsible for the operational business, but also for long-term strategy, risk management and the company's positioning in the market. A CEO like Jamie Dimon at JPMorgan or, before him, Lloyd Blankfein at Goldman Sachs, shapes the image and perception of the bank in the public eye, among investors and among employees. BlackRock's success, in turn, would be unthinkable without Larry Fink, one of the world's most well-connected financial executives. In an industry that depends heavily on trust, relationships and expertise, such individuals are often more important than in other industries. Recruiting, retaining and developing talent is a top priority for banks. At the same time, competition for the best talent in the industry is intense, as they can directly contribute to success and differentiation in the market.
In the third quarter of 2024, Morgan Stanley performed strongly with net revenues of $15.4 billion, a significant increase of 16 percent year over year. Compared to the previous quarter, revenues increased by 2 percent.
Source: StocksGuide P&L Morgan Stanley
The company benefited from robust market activity and solid results in all business areas. Growth was particularly strong in asset management, which increased by 14 percent to $5.4 billion. But fee and commission income also rose sharply by 18 percent year-on-year to $1.2 billion. While trading and investment banking were down compared to the previous quarter, they performed strongly compared to the previous year, with revenues up 9 percent and 52 percent respectively.
At the segment level, Institutional Securities saw strong growth across equity trading and investment banking, fueled by increased client activity and improved sentiment in the capital markets. Fixed income also generated stable revenues despite volatile markets.
In Wealth Management, Morgan Stanley generated record revenues of USD 7.3 billion, supported by strong asset management fees and a significant increase in assets under management. The segment recorded net inflows of USD 64 million in the reporting quarter, bringing assets under management to USD 7.5 trillion. The focus on recurring fee income and the expansion of the business contributed to the increase in efficiency.
The Investment Management segment also grew, driven by higher average assets under management, which reached $1.6 trillion at the end of the quarter. Long-term net inflows of $7 billion had a particularly positive impact, reflecting demand for the company's investment services.
Morgan Stanley also continued to strengthen its capital base, as evidenced by an increase in Tier 1 capital (the most stable assets) and a solid capital buffer. Morgan Stanley CEO Ted Pick highlighted the company's robust performance and potential for sustainable growth, supported by the integrated structure of the business model and disciplined cost management. Overall, the third-quarter results showed that Morgan Stanley benefited from positive market developments and strong customer demand, while also increasing efficiency and profitability. No specific outlook for the following quarter was given. However, the environment remains good.
If Morgan Stanley doesn't dare, the analysts dare. They forecast revenues of $60 billion for 2024. By 2027, they could rise to almost $68 billion, according to consensus.
Source: Morgan Stanley revenue forecast 2027 and growth
On the earnings side, the development could be even more dynamic. The expected net profit of $11.8 billion in 2024 could rise to almost $15 billion by 2027. Revenue growth is in the mid-single digits, while EPS growth is seen in the high single digits.
Source: Morgan Stanley EPS growth through 2027 and P/E
Overall, analysts expect a moderate upward trend. The valuation with a current P/E ratio of 20 could thus fall to below 15.
The dividend analysis of Morgan Stanley's shares shows an overall solid dividend policy supported by a number of positive factors. In particular, the long dividend history is convincing. However, it was affected by the financial crisis in 2009. Strong regulations demanding more security and an overall weak financial market, which only recovered after years, weighed on the business of many major banks. This is also reflected in the development of dividends, which fell dramatically in 2009 and bottomed out at $0.20 in 2010. From 2014, they started to rise again – and have done so without interruption ever since.
Source: Morgan Stanley dividend history 25 years
What is particularly noteworthy in the dividend analysis is the continuity of dividend payments over the last ten years. Not only did Morgan Stanley pay constant dividends during this period, but it also increased its payments to shareholders without exception. A particular momentum has been evident since 2021, when the pace of dividend increases accelerated.
There are reasons for the significant increase in Morgan Stanley's dividend from 2021 onwards. It is due to the company's improved financial situation and strategic successes. In particular, the acquisitions of E*TRADE in 2020 and Eaton Vance in 2021 played a central role here. They broadened the company's earnings base and provided a more stable and predictable earnings structure. This made Morgan Stanley less dependent on the volatile earnings from investment banking. At the same time, the company benefited from the exceptionally favorable market conditions following the COVID-19 pandemic. The expansionary monetary policy of the central banks, low interest rates and high liquidity in the capital markets led to an increase in trading activities, a boom in the mergers & acquisitions sector and strong growth in assets under management. As a result, profits rose significantly. A strong dividend increase was therefore overdue. Another reason for the sharp dividend increase is the decision of the US Federal Reserve and the regulatory authorities. They decided to lift the restrictions on capital distributions introduced during the pandemic in 2021. This gives Morgan Stanley more flexibility to return capital to shareholders. The increase was also part of a strategy to make the stock more attractive to long-term investors. Especially in an environment of low interest rates, the dividend became an important factor in attracting income investors and improving the return on capital.
The good dividend growth can also be measured in figures: over the last five years, it has been an impressive 22 percent. However, the pace cannot be maintained with organic growth, as the latest growth rates show. With a payout ratio of 43 percent in the last three years, however, there is still room for improvement. Further regulatory easing by the new Trump administration also provides scope for imagination. However, they also increase the risk of new financial crises. For all three points, the dividend analysis received the full three points.
Morgan Stanley's shares received fewer points for dividend yield. For example, the current dividend yield of 2.7 percent received only one point, which, compared to many other stocks, represents an attractive yield, even if it is slightly below the long-term average of 2.9 percent over the last ten years. The latter still received two out of three possible points in the dividend analysis. However, the decline in the dividend yield over the ten-year period is also due to the sharp rise in the share price. This increased by 274 percent since December 2014.
Source: Dividend Score of the Morgan Stanley stock
In total, the Morgan Stanley share receives 12 out of a possible 15 points in the dividend analysis, which represents a very good rating and makes the share shine as a top scorer of the dividend strategy. Above all, the combination of an attractive dividend yield, a solid payout ratio, a long history of stable dividend payments and strong dividend growth makes the stock a potentially good choice for income investors seeking both stability and growth.
A historical and industry-specific comparison shows that the valuation of Morgan Stanley shares is moderate to slightly elevated. With a current price-earnings ratio (P/E) of around 20 based on the last twelve months, the valuation of the share is above the long-term average. But a premium is also paid in comparison to its direct competitor Goldman Sachs.
Source: Comparison of P/E ratios between Morgan Stanley and Goldman Sachs
This also applies to the banking sector as a whole. However, the relatively high valuation from the earnings side also reflects the good business performance and high growth rates in the wealth and investment management segments. The expected P/E ratio of 17.9 expresses precisely this. Market participants expect further earnings growth, which justifies the current valuation to some extent and strengthens confidence in Morgan Stanley's future prospects.
Source: Valuations of the Morgan Stanley stock
But a look at the intrinsic value also shows that a premium is being charged for the company's assets. The price-to-book ratio (P/B) is 2.3. This means that the share is trading at more than double the value of the assets reported on the balance sheet. In the end, this is higher than for many commercial banks, but typical for investment banks and asset managers that are heavily geared towards asset management and capital market business and thus achieve higher returns on capital. A higher P/B ratio in this area indicates that the market recognizes the company's high profitability and ability to generate high returns on equity over the long term. It also suggests fewer hidden liabilities such as non-performing loans.
The current dividend yield of 2.7 percent can also be considered attractive, especially in the current market environment in which many investors are looking for stable sources of income. It is above the industry average and well above the S&P 500 dividend yield. However, the elevated valuation also suggests that the market views Morgan Stanley as a quality stock that trades at a premium to traditional banks due to its diversified business model and robust return on equity. Investors pay a premium for the stock, but in return they get access to a company with solid growth prospects, stable dividends and a strong position in the lucrative wealth management and investment banking sectors. Above all, Donald Trump, the banks' preferred candidate, was elected. He stands for deregulation, which could mean more business. Higher inflation due to the relocation of important industries could also lead to higher interest rates in the long term. In the end, both are good for the banks. Not least, a looser antitrust policy under Donald Trump could also boost the mergers and acquisitions business again – a core business for Morgan Stanley.
Morgan Stanley's stock offers a compelling mix of stability, growth potential and attractive distributions. As the now most highly capitalized US investment bank, the company occupies a leading market position and benefits from strong demand for advisory, trading and wealth management services. In particular, the business model, with its strong focus on wealthy private clients and institutional clients, ensures stable, recurring revenues. This strategic orientation alone justifies higher valuations compared to traditional banks, as Morgan Stanley is not only transaction-driven, but is increasingly also supported by long-term, fee-based revenues.
While the expected price-earnings ratio of just under 18 is not cheap, the above-average dividend yield of 2.7 percent still offers investors an attractive source of current income. In addition, there is potential for further dividend increases, supported by a solid capital base and continued growth in high-margin areas. With Donald Trump as the new president, bank stocks could also benefit from a deregulated political environment that would result in less supervision and lower capital requirements. At the same time, persistently high inflation, which would not be unusual in Trump's economic policy environment, could lead to pressure to raise interest rates.
Source: Analysts' opinions on Morgan Stanley stock
The analysts see the stock mostly (71 percent) as a holding position. Around a quarter still see it as a buy, while one analyst advises selling. However, the average price target of 125.26 US dollars is already almost 5 percent below the last trading price. This confirms the impression that the current valuation already anticipates a lot. And indeed, if investors do not expect more than a single-digit increase in sales and profits from this major bank in the medium term, an expected P/E ratio of 18 would not be a bargain.
If you would like to receive new investment ideas and free stock analyses selected according to the Levermann, High-Growth Investing or Dividend Strategy by email every week, you can now subscribe to our free StocksGuide newsletter.
The author and/or persons or companies associated with the StocksGuide own or may own shares in CVS Health. This article represents an expression of opinion and not investment advice. Please note the legal information.