The company raised its quarterly dividend last week by a massive 32.90% to 48.50 cents/share. With this increase, the company's annual divided has increased for the eleventh consecutive year since becoming a public company in 2007.
The new quarterly payment is almost seven times larger than the dividend payment from a decade ago. This was possible due to the rapid expansion in the dividend payout ratio, as earnings managed to double.
For history buffs, Broadridge Financial was spun-off from Automatic Data Processing in 2007. ADP itself has a long history of growth and dividend increases, which it has passed onto its spin off-spring.
This dividend achiever is careful in its capital allocation strategy, as it focuses on projects with high return on investment, which could improve its competitive position and ability to serve its customers efficiently and cost effectively. This mindset has allowed the company to grow earnings and excess free cash flows, the majority of which are distributed in the form of dividends and share buybacks.
Earnings per share rose from $1.58/share in 2009 to $3.56/share in 2018. Broadridge is expected to earn $4.64/share in 2019.
I like the fact that close to 60% of revenues are recurring in nature. That recurring base has good visibility, and there is strong organic revenue growth of 7-9%/year driven by large addressable market opportunities. There is a high predictability in the company’s business model.
Overall revenues are expected to grow in the 5% - 7%/year range for the foreseeable future. The company expects annual EPS growth in the 14% - 18% range over the next three years.
I like the fact that the company also has a dominant position in a lot of the markets it serves. Its scale should bode well for keeping costs in check, and preventing competitors from undercutting its services.
Broadridge processes and distributes proxy materials, regulatory reports, sales & educational content, newsletters, trade confirmations, and account statements.
The company processes 80% of outstanding shares in the US, and over 50% for the rest of the world. The company also communicates over 90% of the broker regulatory communications to 140 million individual accounts, reaching 80% of North American households. Broadridge bills the public companies it serves for the cost of providing this information through the broker, and takes a cut.
The scale of operations is staggering, as it also clears and settles over $5 trillion dollars per day. The company serves 80% of primary fixed income dealers and processes equities for 7 of the top 10 investment banks.
The company’s front office solutions are utilized by 25% of US Financial Advisors, and it provides data aggregation services as well. Its technology wealth management platform therefore supports 50 million accounts, and Broadridge also supports 100,000 retirement plans through its mutual fund settlement platform. Wealth management is an opportunity for future growth for Broadridge.
Broadridge has also reduced the number of shares outstanding from 140 million in 2008 to a little less than 120 million by 2018.
The dividend payout ratio has increased from a mere 18% in 2009 to 42% in 2018. The rapid increase in dividends was possible due to the low initial payout ratio. Going forward however, investors should expect dividend hikes that are limited by the growth in earnings per share. Based on company’s presentations, Broadridge is expecting to grow earnings by more than 10%/year.
Right now, the stock is overvalued at 28 times forward earnings. Broadridge Financial has a forward yield of 1.50%. The dividend seems wells covered by earnings. The stock may be worth a second look on dips below $92/share.
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