The folks at Dividend.com have a teaser pitch for us this week, selling their premium service by hinting at an idea that they say is winning during the pandemic… and will be “poised to make the most out of the future” … and I’m awfully hesitant about chasing the most richly-valued growth ideas at the moment, so maybe it’s time to pause for a day and think about dividends. Ready?
Here’s the basic spiel about what this secret company does:
“Our pick is already the name in proxy and required regulatory services for publicly traded companies. As required by law, firms are required to make filings, provide shareholder meetings, and other proxy events. It’s also the leading processor of securities trades and record keeping. This niche has continued to benefit our pick with oodles of steady revenues. And now with Joe Biden pledging to increase regulation and financial documentation, our pick is poised to see this side of its business grow.”
And yes, we get that most exciting of comparisons: They hint at this as the “Zoom of the Financial World,” which makes us all sit up and take notice. After all, Zoom Video (ZM) at its peak was up more than 700% this year, as the pandemic forced us to move all of our social, work and school interactions online.
So what other clues do we get about this dividend-paying “fintech” stock? Here’s some more from the ad:
“It is launching new platforms to allow companies to meet their regulatory requirements. This has quickly made it the ‘Zoom of the financial world.’ The best part is that cost savings for firms is great, allowing for the platform to stick around even in a post-COVID world.”
And then a few specific hints:
“… more than $4.5 billion in sales for fiscal 2020….
“3-year EPS growth rate of 17% CAGR…
“healthy payout ratio of 45% and growing yield of 1.55%.”
If those terms don’t mean anything to you, CAGR stands for Compound Annual Growth Rate, which is one way of annualizing trailing growth to describe past progress… “payout ratio” is the percent of earnings that are paid out in the form of a dividend… and “yield,” of course is the actual annual dividend payout the company is currently making, as a percent of the current share price.
1.55% is not a great annual payout, that’s just about average right now for the S&P 500… but if it’s growing at a good pace even a relatively small yield can compound a meaningful amount of shareholder value over time… with all dividend-paying companies, especially dividend growth companies, time and patience are your friends.
So what’s our “fintech” stock being teased today? This is Broadridge Financial Solutions (BR), which is indeed a service provider for the financial industry — they were spun out of ADP about a dozen years ago, and struggled (understandably) to get any traction in the first few years after the financial crisis, when investors were shy, but things have certainly picked up since 2013 or so… here’s what the return has looked like over the past five years for BR, relative to the S&P 500:
Broadridge is still a relatively small company, at least compared to the giant investment banks who are often its partners — they have a market cap of about $17 billion, and they have been able to grow at a pretty solid pace. The one concern I’d have with Broadridge after a quick look is that they have benefitted greatly from multiple expansion over the past five years — the price has tripled because of the leverage of revenue and earnings growth applied to a growing PE ratio, so while the revenue has grown nicely (up about 50%), and the earnings per share have also grown well (up almost 100%), the gain for shareholders has been amplified because the multiple has grown — investors were willing to pay 20X earnings five years ago for this company, and today they’re willing to pay 35X earnings.
The business is quite steady, and from what I can tell it should continue to do well as more investors are involved in the markets and more companies come public to greet the enthusiastic crowds of IPO buyers, but if investors suddenly rethink their outlook and decide to value steady dividend-paying growth companies at 20X earnings again, instead of 35X, the stock could easily fall — the estimate is that BR will earn about $5.50 per share in the current fiscal year (which they’re almost halfway through, their 2021 FY), so at 20X earnings that would be a $110 share price, and at 15X it would be more like $80, either of which would obviously be a big drop for a company that’s currently priced at about $147 a share.
That’s the risk here, as I see it… assuming, of course, that there’s no great surprise from the company in terms of scandal or a big “miss” in some future quarter as they lose business to a competitor. And it’s not a Broadridge Financial risk, really, it’s market risk — the whole market is trading at lofty multiples, and there are hundreds of large and successful companies that are similarly trading at valuations that we would have considered foolhardy a decade ago. If the economy bounces back and investors remain happy next year, it could certainly still work out, but the general “bubble” state of the markets right now is a clear concern for any company, even for big, successful and pretty steady dividend-paying leaders like Broadridge.
The good thing is that Broadridge has been doing better than expected, and that really helps — their last quarter showed a strong bounce in earnings, much better than analysts had anticipated, so if that continues into their really big quarters (their March and June quarters are always their biggest earnings periods), then we could see some nice recovery.
The company itself is indicating that growth will be slower in the next few years than it was in the last three — last week at their investor day they guided investors to expect a CAGR of 8-12% in adjusted earnings for 2020-2023, with recurring revenue growing at a 7-9% pace. Their target this year is much lower than that, with EPS growth anticipated at 6-10%, but I wouldn’t be surprised if those numbers will turn out to be lowball estimates… particularly if investor mania continues to remain high, with a lot of IPOs and corporate actions and shareholder votes. In a world of asset price bubbles, which seems likely to persist well into the future thanks to low rates and stimulus spending, the company that helps the wealthy pull the right levers and stay in compliance with the rules should be in high cotton.
And as we so often see with these kinds of companies, it’s sometimes hard to tell whether it’s the success of the company that’s driving the dividend growth…. or the dividend growth that’s driving the share price higher. Investors love dividend growth, and you can see the clear relation ship between the rising dividend and the rising share price over the past three years… this charts the share price and the trailing annual dividend over that time period:
The slowdown in dividend increases indicates that our expectations for the next few years should be lower than the 60% share price gain BR has shown in the past three years — but that’s true for all stocks right now, paying these prices means our expectations of future gains should be muted, and we’re no longer going to have the blessing of falling interest rates to make dividends look more impressive (they might stay low, but they can’t go much lower). The last dividend increase for BR was 6% in August, following hikes of 13% and almost 30% in previous years, so if you need something to help you “cool your jets” on this idea, maybe that’s it. Being able to raise the dividend at all this year is a nice positive sign, but a 6% increase is no green light for lusty speculation.
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Will they be the “Zoom of the Financial World?” Not in terms of revenue or user growth, the business is not that broad-based… but their offering for virtual shareholder meetings, for example, did immediately take leading market share this year and host meetings for 282 of the companies in the S&P 500, and they scaled that business up to support 6.5X the demand they saw in the previous year, so they’re clearly doing well at maintaining their leadership in regulated shareholder communications. That specific product is not really the driver for the company, it’s but one of the web of communication, governance, and compliance products they offer, but it’s a good sign that they didn’t lose their hold on this market during a year of upheaval. We can’t know if they’ll continue to “win” in the ongoing digitization of financial services and regulated communication, one never knows where real “disruption” will come from… but so far they seem to be doing just fine, and leaders in highly regulated industries (like financial services) tend to be able to resist disruptive newcomers better than most, given how hard it is for newcomers to build and maintain the trust and compliance record that the incumbents like Broadridge have developed over years.
So I’d look on Broadridge pretty positively here, relatively speaking. I’m hesitant to get super excited about any “steady growth” stock that’s growing earnings at ~10% but valued at more than 25X next year’s earnings, but if you don’t want to sit back and wait for the next market downturn to pick off stocks on bad days, this is one that has had a steady business dominated by recurring subscriptions and long-term relationships, and it’s trading at pretty much the average valuation for S&P 500 companies right now. It’s probably an above average company, trading at an average price — maybe not the kind of thing that will send you running for your checkbook, but usually setups like that worth considering. I don’t own Broadridge, but after reading up on them following their Investor Day presentations last week, I’d be inclined to nibble a bit on this one, and think about building a larger position if it drops to a more discounted valuation in the months ahead. It’s not going to be a barn-burner like Zoom Video (ZM), and it’s certainly possible that investors in BR are overpaying a bit for the analyst expectations of pretty tepid growth right now, as they’re generally overpaying for almost everything in this market, but I’d sleep a lot better buying BR than ZM today.