Since the depths of the financial crisis, plenty of big banks such as Bank of America (BAC), Citigroup (C), and JPMorgan Chase (JPM) have managed to rebound nicely and beat the market.
However, pure play investment banks such as Goldman Sachs (GS) and Morgan Stanley (MS) have lagged the S&P 500 by large margins.
| Stock | Total Return Since March 3, 2009 |
| Bank of America | 381% |
| Citigroup | 311% |
| JPMorgan Chase | 290% |
| Goldman Sachs | 137% |
| Morgan Stanley | 102% |
| S&P 500 | 259% |
Find out whether or not Goldman Sachs’ poor performance could represent a long-term buying opportunity or whether the poor stock performance is a sign of something rotten in this venerable financial institution.
In other words, is Goldman Sachs a classic deep value dividend growth stock or a value trap to be avoided? The company has rewarded shareholders with nearly 10% annual dividend growth over the past 10 years and has solid income growth potential going forward.
Let’s take a closer look at Goldman Sachs to see if it is the type of stock we would be interested in owning in our Top 20 Dividend Stocks portfolio.
Business Description
Goldman Sachs was founded in 1869 and is one of the oldest and largest standalone investment banks in the world. It serves, private, institutional (corporate, hedge fund, pensions, foundations, endowments), and governments through four business segments:
- Investment Banking: advice for corporate needs such as IPOs, mergers & acquisitions, divestitures, defense against hostile takeovers, spinoffs, raising debt capital, private placements, and derivatives
- Institutional Client Services: acts as broker, clearinghouse, and market maker for major institutions such as hedge funds, ie actually executes trades and keeps tracks of institutional portfolios, dividends, tax forms, for markets such as: stocks, currencies, interest rate products, mortgages, and options
- Investing & Lending: originates and invests in long-term loans, investments, and real estate
- Investment Management: fee based advice, wealth management, and brokerage service
For the first 9 months of 2016, here’s how Goldman’s sales have broken out by segment.
| Business Segment | YTD Revenue | % of Revenue | YoY Growth |
| Investment Banking | $4.787 billion | 21.3% | -13% |
| Institutional Client Services | $10.872 billion | 48.5% | -11% |
| Investing & Lending | $2.596 billion | 11.6% | -37% |
| Investment Management | $4.183 billion | 18.6% | -10% |
| Total | $22.438 billion | 100.0% | -15% |
Source: Goldman Sachs Earnings Release
Business Analysis
As you can see, Goldman’s year-to-date results are hardly something to write home about. In fact, in terms of revenues through the first three quarters of the year, 2016’s results are the poorest since 2011.
Source: Simply Safe Dividends
Only Goldman’s most recent quarter showed any signs of a recovery in sales, though improvements in operating margin and EPS have been underway for three and four quarters, respectively.
That’s due in part to the bank’s strong emphasis on cost cutting. For example, in the last quarter expenses fell 26%, mainly due to non-compensation expenses declining by about 40%.
In addition, Goldman is attempting to diversify into more stable retail (i.e. consumer) banking thanks to a recent acquisition of GE (GE) Capital’s deposits that saw its retail banking deposits soar to over $100 billion, up from just $15 billion in 2007.
Source: Goldman Sachs Investor Presentation
However, while Goldman has managed to make good progress in diversifying its revenue streams and cutting expenses, there are two main problems faced by the bank that make JPMorgan Chase and Wells Fargo seemingly better long-term investments.
The first is that retail deposits, which serve as a cheap source of capital, despite their impressive growth, still represent a very small source of funding for the bank. In addition, retail banking is generally far more stable than investment banking because consumers continue to use retail banking services even during economic downturns while things like IPOs and mergers and acquisitions tend to fall off a cliff.
