Jan. 19 (Bloomberg) -- Merrill Lynch & Co., the world's biggest securities firm by market value, said fourth-quarter profit rose 25 percent as stock-trading revenue and merger advisory fees surged. The company's shares rose to the highest since February 2001.

Net income for the three months ended Dec. 30 climbed to $1.5 billion, or $1.51 a share, Merrill said in a statement today. That topped even the optimistic analyst estimates. The firm raised its dividend 25 percent for the second time in less than a year and plans to accelerate stock buybacks this quarter.

Merrill had the second-biggest gain in equity trading on Wall Street after Lehman Brothers Holdings Inc., buoyed by demand for stocks and convertible debt. Advisory fees rose 42 percent as mergers and acquisitions surged and Merrill, led by Chief Executive Officer E. Stanley O'Neal, gained ground on rivals.

``O'Neal has a good sense of where the business focus should be,'' said Douglas Altabef, who helps manage $1.8 billion, including Merrill shares, at Matrix Asset Advisors in New York. ``He's been able to take advantage of a good business environment.''

The firm said its quarterly return on equity, a measure of how effectively a company reinvests earnings on behalf of shareholders, was the highest in five years at 18 percent. Revenue rose 15 percent to a record $6.8 billion in the fourth quarter and 18 percent in 2005. O'Neal, 54, has run Merrill since December 2002.

``The growth story is in midstream,'' Chief Financial Officer Jeffrey Edwards, 44, said in an interview. He said Merrill's business last year grew faster overseas than in the U.S.

Wall Street Record

Merrill's record net income for the year of $5.22 billion brings total earnings for the top five Wall Street firms to $19.8 billion in 2005, the highest ever.

Of the group, Merrill had the best-performing stock in the fourth quarter. Its shares climbed more than 10 percent, while Lehman rose 10 percent and Goldman Sachs Group Inc., Morgan Stanley and Bear Stearns Cos. each rose about 5 percent. All five firms are based in New York.

Merrill shares rose $2.44, or 3.5 percent, to $72.05 in composite trading on the New York Stock Exchange today. The stock's all-time closing high was $80 in January 2001.

``This is not an expensive stock,'' Altabef said. ``We think Merrill certainly has a significant amount of upward opportunity.''

Dividend, Buyback

Merrill's quarterly dividend will rise to 25 cents for shareholders of record as of Feb. 6, up from 20 cents. Edwards said the firm plans to buy back more of its stock this quarter than the $714 million it spent repurchasing 10.9 million shares in the past three months.

Pretax earnings at Merrill's global markets and investment- banking unit jumped to $1.52 billion from $990 million. Co-heads Dow Kim, 43, and Gregory Fleming, 42, raised the unit's profit margins to 44 percent from 34 percent a year earlier. Advisory fees surged to $350 million, bringing total investment-banking revenue to $896 million.

``I look at my forecast and, frankly, I was off by $180 million on their investment-banking side,'' Sanford C. Bernstein & Co. analyst Brad Hintz said. ``M&A did extremely well.''

Merrill climbed to No. 2 in completed mergers in the quarter, up from fourth a year earlier, as the firm's bankers worked on 75 deals valued at $172 billion. That compares with 58 transactions valued at $112 billion a year earlier, data compiled by Bloomberg show. Goldman remained No. 1.

`Pipeline'

Edwards said on a conference call with analysts that Merrill's ``pipeline'' of underwriting assignments and mergers that haven't yet been completed is the strongest since 2000.

``Confidence levels are good among CEOs,'' he said.

Equity markets revenue rose 39 percent to $1.2 billion, keeping pace with Merrill's Wall Street competitors in the securities industry's fastest-growing business. Revenue from debt markets advanced 13 percent to $1.38 billion.

Fox-Pitt Kelton's David Trone, rated one of the most accurate analysts following Merrill, expected earnings of $1.29 billion, or $1.33 a share. Of the 17 analysts surveyed by Thomson Financial, Lehman's Mark Constant had the highest estimate at $1.40 a share. The average was $1.30.

Analysts underestimated the firm's earnings by an average of 5.8 percent during the previous six quarters.

``Investment banking is relatively easy to forecast, but the trading side is a tough one,'' said Hintz. Merrill said revenue from principal transactions -- which include trades for its own account -- more than doubled from a year earlier to $715 million.

Compensation Costs

Sandler O'Neill Partners analyst Jeffery Harte said Merrill cut compensation costs more than he expected. The firm said it spent 43 cents of every dollar on compensation and benefits, the lowest in two years. Harte was expecting more than 46 cents.

Pretax profit at Merrill's brokerage for individual investors climbed 19 percent to $620 million as revenue from derivative products and fee-based services rose. The unit, which oversees $1.5 trillion in client assets and is run by Robert McCann, 47, accounts for more than 40 percent of the firm's revenue. Pretax margins rose to more than 21 percent from almost 20 percent a year earlier.

At Merrill Lynch Investment Managers, the firm's money- management arm, pretax profit jumped 35 percent to $176 million.

Merrill said tax expenses for repatriating $1.8 billion of earnings from overseas subsidiaries cut fourth-quarter profit by $113 million, or 12 cents a share.

The firm added 1,500 employees during the quarter, bringing its total workforce to 54,600. ``There is certainly a heightened war for talent out there,'' Edwards said.

Merrill Lynch is a passive, minority investor in Bloomberg LP, the parent of Bloomberg News.

To contact the reporter on this story: Gregory Cresci in New York at gcresci@bloomberg.net.

Last Updated: January 19, 2006 16:32 EST