Diamond Hill Investment Group

DHIL is down nearly 40% from its highs in 2021. Dividends and buybacks have averaged $56.2 million the last three years -- around a 15% yield on today's market cap. Current dividend yield is 4.33%.

Diamond Hill Investment Group is a $376.6 million market cap asset manager based out of Columbus, Ohio, that was founded in 1990 and went public in 1996. Ric Dillon, a go-getting value investing fanatic, was named CEO in 2000 and grew DHIL’s minnow of an AUM into an institutional player. Until Ric’s retirement in 2018, Diamond Hill saw its assets soar from $25 million to $22 billion, or about $1.2 billion per year, or $3.28 million daily, and DHIL’s price went along for the ride.

The stock was ranked in the top one percent of all public companies in the United States in total shareholder return during Dillon’s tenure, compounding at 27%. Which means if you would have made the shrewd decision to invest one grand into DHIL when the dot com bubble busted, and held on tight through the bear market that followed, as well as 9/11 and the ‘08 financial crisis, and as “value” investing zig zagged in and out of favor among other things, you’d have an extra $73,869.81 in your account, and perhaps a poster of Ric stamped somewhere in your not so humble abode.

But it’s been seven years since Ric left DHIL, and that luscious seventy-bagger has crimped to a mere forty-something-bagger. An absolute travesty, you’re sitting pretty, but deprival super reaction syndrome stings, and a bull market with no bounds is still rubbing salt in your wounds. Worse yet is that Ric sprung out of retirement just a year later, when Heather Brilliant, DHIL’s new CEO, called him and said the company was dropping its private asset management business.

High net worth clients were near and dear to DHIL before they had bigger fish to fry, and Ric certainly wasn’t going to leave them out to dry. So he recruited some colleagues from DHIL and launched VELA Investment Management to service them. “VELA” is an acronym that stands for “Valuation-Centric, Experienced Investors, Long-Term Orientation, Alignment of Interests” which is a mouthful, but more important is that Ric has always walked his talk.

Upon arrival, he made sure DHIL’s board was compensated strictly with shares of the company’s mutual funds and that they were held until departure. The majority of employee compensation was also share-based. Ric understood Munger’s “Show me the incentive, and I’ll show you the outcome” and it paid off for everyone. He was focused on educating clients, too, and was confident DHIL could keep them on board once they committed that first dollar. All told, Ric has cared for his customers more than the competition and is admired for that.

‘“He had a lot of respect from people in the firm,” Meuse says. “He’s well-liked, a kind person. That’s not the case with many money managers—a lot of them don’t care about people. They’re just interested in making money. I think that’s a big deal. I care for him and I respect him, and I think most people respect him.’”

That’s an excerpt from Tim Feran’s “CEO Ric Dillon returns from retirement to serve Vela Investment Management” written in 2020. In it, Feran writes that Ric retired because of his new venture – having a kid. After reading the following from a 2007 Q&A with Ric in Smart Business Columbus, I doubt that’s the reason.

“Q: What pitfalls can prevent a company from growing?

The first is arrogance. We believe that we can always get better at what we’re doing, and we’re always looking for ways to improve. Even when we’re having especially good years, we, don’t sit back and say, ‘That was sure a good year.’ We say, ‘Where could it have, been better, and how can we get better?’ And, the second pitfall is complacency. At a minimum, opportunities will be missed, and at a maximum, things won’t get fixed. When the improvement doesn’t come and things go the wrong way - it becomes glaring and then you see the issue. If you had been looking for it, you wouldn’t have to wait until the problem made it painfully clear.”

I’m speculating here, of course, but Ric probably ditched DHIL because he thought they got too big for their britches. Billions and billions of dollars flowed in and things became more bureaucratic. Or perhaps the new fixed-income products bugged him, or the fact that board members started receiving cash compensation instead of stock. Anyway you slice it, Ric is gone for good and is now a competitor down the street. Per last quarter, VELA had $369 million of AUM, a doubling from three years ago. He’s heating up!

Gathering and spreading dollars across hundreds of low p/e stocks isn’t rocket science, however, and DHIL hasn’t completely lost its way. One third of employees have been with the company for more than a decade, and they were recognized in Pensions & Investments’ “2024 Best Places to Work in Money Management” and their most recent annual report is still littered with words like: long-term, disciplined, intrinsic value, and duly notes that their 127 employees have investments in the firm’s strategies, which include:

U.S. equity portfolios totaling around $22 billion, spread across large cap, small-mid cap, mid cap, select, small cap, large cap concentrated, and micro cap funds with AUM of $17.7 billion, $2.0 billion, $1 billion, $0.8 billion, $0.3 billion, $0.1 billion, and $0.03 billion, respectively. Rounding out the rest of their assets are fixed income – $6.2 billion, long short – $1.7 billion, and international – $0.1 billion. DHIL has assets under administration (AUA) of $1.9 billion as well, bringing its total AUM to $31.9 billion.

DHIL scraped a 0.45% advisory fee last year, which brought home $143.3 million of revenue, and they also collected $7.7 million of fund administration fees. Compensation was the brunt of expenses at $74.9 million, followed by G&A of $16.8 million, sales and marketing of $7.5 million, and fund administration of $3.5 million, resulting in operating income of $43.9 million. DHIL’s $159.6 million investment book, comprising company funds, generated $15.1 million of income, too. Dividends and interest accounted for $5.2 million of that. Net income amounted to $43.2 million, and diluted shares outstanding were 2,757,860, resulting in EPS of $15.66.

Capital allocation is a strong point as well. DHIL sold its high-yield credit business to Bradywine in 2021 and repurchased $103 million of stock from 2022 to 2024 – an 11.3% shrinkage of shares out – and issued $65 million of dividends. Share count will also continue to decrease. Management approved another $50 million repurchase program last fall, and they used up $11.9 million in the past two quarters. Plus, insiders own 9.5% of the company, so there’s an incentive to keep growing intrinsic value per share and possibly sell the company down the road.

Today, the stock trades at 8.8x trailing EPS, and netting their cash and investments of $222.6 million against their $45.1 million of lease liabilities and deferred compensation, you get an “EV” to trailing EBIT of 4x. Pretty cheap considering they’ve a capital-light business with no debt and a sticky customer base.

But what matters is the cash they’re able to kick out, and fortunately, dividends and buybacks averaged $56.2 million the past three years – a 14.9% yield on today’s $376.6 million market cap. Now, growth has been a sore subject for them, but active strategies, particularly “value” investing, could get some love over the next decade after this passive bubble pops. In the meantime, you can keep shaking your fist at the mag seven and put DHIL on your watchlist, or maybe start snacking on that 4.33% dividend yield.

Note:

Equity flows are leaking ($ in millions) —

2022: ($2,247)

2023: ($1,865)

2024: ($2,544)

But fixed income has done a decent job of patching —

2022: $6

2023: $1,371

2024: $2,255

Net flows —

2022: ($2,241)

2023: ($494)

2024: ($289)