Diamond Hill Investment Group, Inc. (NASDAQ:DHIL) is a diversified asset management firm that has consistently delivered strong financial performance for its shareholders. With a focus on valuation-disciplined active portfolio management, the company has built a reputation for generating excellent long-term investment outcomes for its clients.
Business Overview
Diamond Hill Investment Group, Inc. (DHIL) is the parent company of Diamond Hill Capital Management, Inc. (DHCM), a registered investment adviser. DHCM provides investment advisory and fund administration services to a variety of clients, including the Diamond Hill Funds, a series of open-end mutual funds, as well as separately managed accounts, collective investment trusts, other pooled vehicles, and model delivery programs.The company's investment strategies span multiple asset classes, including U.S. equity, international equity, and fixed income. As of March 31, 2023, DHIL had $29.98 billion in assets under management (AUM) and an additional $1.94 billion in assets under advisement (AUA), for a total of $31.92 billion in AUM and AUA.
Financials
DHIL has demonstrated consistent financial performance, with annual revenue of $136.72 million, annual net income of $42.23 million, annual operating cash flow of $45.60 million, and annual free cash flow of $45.58 million in the most recent fiscal year.For the three months ended March 31, 2023, the company reported revenue of $36.30 million, a 7% increase compared to the same period in the prior year. Net income attributable to common shareholders was $13.02 million, or $4.62 per diluted share, compared to $12.71 million, or $4.20 per diluted share, in the first quarter of 2023.
The increase in revenue was primarily driven by a 10% increase in total average AUM and AUA, partially offset by a decrease in the average advisory fee rate from 0.48% to 0.46%. Operating profit margin was 23% for the first quarter of 2023, compared to 32% in the same period of 2022, with the decrease primarily due to higher deferred compensation expense, compensation and related costs, and general and administrative expenses.
Adjusted operating profit margin, which excludes the impact of market movements on the deferred compensation liability and related economic hedges, as well as the impact of the Consolidated Fund in 2023, was 32% for the first quarter of 2023, compared to 35% in the prior-year period.
Investment Performance
DHIL's investment strategies have consistently delivered strong performance for its clients. As of March 31, 2023, the company's U.S. Equity strategies had an average 3-year annualized return of 12.5%, outperforming their respective benchmarks by an average of 3.2 percentage points. The company's Alternatives strategy had a 3-year annualized return of 8.7%, and the Fixed Income strategies had a 3-year annualized return of 4.9%.The company's focus on valuation-disciplined active portfolio management has been a key driver of its investment performance. DHCM's investment team conducts rigorous fundamental research to identify undervalued securities, with the goal of generating excess returns for clients over the long term.
Shareholder-Friendly Capital Allocation
DHIL has a history of returning capital to shareholders through a combination of dividends and share repurchases. The company's board of directors recently approved a quarterly cash dividend of $1.50 per share, payable on June 14, 2023, to shareholders of record as of the close of business on June 3, 2023.In addition, DHIL repurchased 85,108 common shares during the first quarter of 2023 for a total of $13.2 million. As of March 31, 2023, $13.3 million remains available for repurchases under the company's 2023 Repurchase Program.
Liquidity
DHIL maintains a strong balance sheet, with a significant amount of its assets comprised of cash and cash equivalents, investments, accounts receivable, and other current assets. As of March 31, 2023, the company had working capital of approximately $146.2 million, providing ample liquidity to fund its operations and strategic initiatives.The company's main source of liquidity is cash flows from operating activities, which are generated from investment advisory and mutual fund administration fees. DHIL believes that these sources of liquidity, as well as its continuing cash flows from operating activities, will be sufficient to meet its current and future operating needs.
Risks and Challenges
While DHIL has demonstrated consistent financial performance, the company faces several risks and challenges that investors should be aware of. These include:1. Reliance on a limited number of large clients: A significant portion of DHIL's revenue is derived from a limited number of large clients, which could expose the company to concentration risk.
2. Competitive industry: The asset management industry is highly competitive, and DHIL faces competition from larger, well-established firms, as well as from passive investment strategies and model portfolio arrangements.
3. Regulatory and legal risks: The company is subject to various regulatory and legal requirements, and changes in these areas could have a material impact on its business.
4. Market volatility: DHIL's financial performance is influenced by market conditions, and periods of market volatility could adversely affect the company's AUM and revenue.
5. Key personnel risk: The company's success is dependent on the continued service of its key investment professionals and other senior management.