Contents
Summary
- This company has doubled its revenue since being spun off as a separate legal entity in 2007.
- Growth has been such that within a span of 11 years this company has reached the stage where it recently became a member of the S&P500 (SPY).
- There is not much variance between Free Cash Flow and Operating Cash Flow meaning growth does not require the company to incur significant capital expenditures.
- An investment in this company from the time it became a publicly traded company has generated shareholder returns in excess of 500% (without dividends reinvested) and in excess of 650% with the reinvestment of dividends.
- Dividend growth since becoming public is in excess of 10% and another dividend increase will very likely be announced within the next few weeks (if history is any indication).
Introduction
I have written 4 articles over the past year about this company with the most recent having been posted February 9, 2018. In all articles I highly recommended the company as a long-term investment.
The company in question provides investor communications and technology-driven solutions for the financial services industry worldwide. It was previously a division of another company until early 2007 at which time it was spun off into a separate publicly traded company.
It was a relatively small company from a market cap perspective in 2007 and flew under the radar for several years. In its first full year as a stand-alone entity, annual revenue was just over $2.1B. The business grew but by the end of FY2013, annual revenue had only grown to ~$2.43B. Fast forward to the end of FY2017 (FYE June 30, 2017) and annual revenue had jumped to in excess of $4.1B.
The company will be releasing its FY2018 results within the next few weeks and revenue will likely be close to the $4.3B - $4.4B range; this growth has been organic and also through acquisitions.
It consistently posts strong earnings and one nice aspect about the business is that its free cash flow is very similar to its operating cash flow; this is much the same as another company about which I recently wrote an article.
The company is no longer flying under the radar as it now has a market cap in excess of $10B. In addition, it recently became a member of the S&P500.
Long-term shareholders have been richly rewarded. It has generated a return in excess of 500% (without dividends reinvested) since going public and the compound annual growth rate of its dividend has been in the double digits over the 11 year period since become a publicly traded entity. If you include the reinvestment of dividends, the total shareholder return is in excess of 650% (Source: Tickertech).
Business Overview
An overview of Broadridge Financial Solutions, Inc. (NYSE: BR) can be found in my February 9, 2017, May 13, 2017, and August 11, 2017 and February 9, 2018 articles. Further details regarding BR’s evolution and the solutions and products it provides to various industries can be found here.
As noted above, BR was added as a member of the S&P 500 on June 18, 2018 (refer June 13, 2018 Press Release).
Q3 and 9 month FY2018 Results
On May 8, 2018, BR released its Q3 and 9 month FY2018 results.
Source: BR - Q3 and 9 Months Earnings Presentation
FY2018 Guidance and 2017 – 2020 Growth Objectives
BR is on track for another steady year of growth and when it released its Q3 results, it announced that it was increasing its Diluted earnings per share growth and Adjusted Diluted Earnings per share.
Source: BR - Q3 and 9 Months Earnings Presentation
Credit Ratings
Moody’s currently rates BR’s long-term debt as Baa1 which is classified as lower medium grade. Standard & Poors rates the debt BBB+ which is also lower medium grade. Neither agency has BR’s debt under review.
Free Cash Flow Conversion
As noted in my February 9, 2018 article, FCF levels in 2012 – 2017 were $0.244B, $0.22B, $0.334B, $0.365B, $0.362B and $0.312B.
In BR’s Q2 2018 presentation, investors were advised that FY2018 FCF guidance was being increased from $0.4B - $0.45B to $0.5B - $0.55B. No change was made when Q3 results were released.
Dividend, Dividend Yield, and Dividend Payout Ratio
BR’s dividend history can be found here. Unfortunately, BR does not keep this section of its site current. In addition, it has completely omitted one of its quarterly dividend payments made in 2012; it only reflects 3 quarterly payments as opposed to 4.
I have used the annual dividend as reported on BR’s annual reports to calculate the compound annual growth rate over the period in which it has been a publicly traded entity. The results are impressive even though the results are distorted by the 2007 annual dividend (only one $0.06 dividend is reflected for 2007 because BR only went public at the end of March 2007 and its fiscal year end is June 30th).
BR has just distributed its 4th quarterly cash dividend of $0.365/share ($1.46/share/year). I expect BR will announce a dividend increase in early August 2018 and envision an increase of at least 10% which would result in a new quarterly dividend of ~0.40 or ~$1.60/year.
On the basis of the July 13, 2018 $118.06 closing stock price, the current and projected dividend yields are ~1.2% and ~1.35%. When I wrote my February 9, 2018 article, BR’s dividend yield was ~1.6% ($1.46 annual dividend and a $90.74 closing stock price). Even with an estimated 10% increase in BR’s annual dividend, the dividend yield has shrunk because of the rapid appreciation in BR’s share price.
Using the current $1.46/year dividend, projected Diluted EPS (GAAP) of ~$3.46 - ~$3.60 ($3.53 mid-point) and projected Adjusted Diluted EPS (Non GAAP) of ~$4.10 - ~$4.23 ($4.165 mid-point), the dividend payout ratio is ~41% and ~35%. These ratios are conservative and the ability for BR to service its dividend commitment appears solid.
In my February 9, 2018 article I indicated that BR’s basic and diluted weighted‐average shares outstanding for the 6 months ending December 31, 2017 were 116.5 million and 120.1 million. These levels increased slightly as at the end of March 31, 2018 to 116.7 million and 120.3 million.
The magnitude of this increase does not give rise for concern and I strongly suspect BR will continue with its policy to reduce share count when share repurchases are deemed to be the best use of free cash flow. Readers should keep in mind that BR’s share count as at FYE2013 was 121.9 million and 125.4 million.
Valuation
As noted earlier in this article, management has increased FY2018 guidance for Diluted EPS (GAAP) to growth of 28% - 33% and growth of 31% - 35% in adjusted Diluted EPS (Non GAAP).
FY2017 Diluted EPS (GAAP) and adjusted Diluted EPS (Non GAAP) amounted to $2.70 and $3.13 respectively. Based on guidance, investors can expect Diluted EPS (GAAP) of ~$3.46 - ~$3.60 and adjusted Diluted EPS (Non GAAP) of ~$4.10 - ~$4.23.
Using the July 13, 2018 $118.06 closing stock price we get a forward diluted PE range of ~32.8 – ~34.1 and a forward adjusted diluted PE of ~27.9 - ~28.8.
As much as think BR is a great company, its valuation is far too lofty for me and I will refrain from acquiring additional shares until such time as BR’s valuation retraces to the low – mid 20s (based on Diluted EPS (GAAP) results).
Final Thoughts
BR is a great company with attractive growth prospects. Had I thought otherwise I would have unloaded the shares I acquired when it was spun off from ADP, I would not have subsequently acquired more shares, and I would not have written a few articles in which I expressed my opinion that investors should acquire shares in the company. At some point, however, I have to draw the line as to how much I am prepared to pay for an additional $1 in EPS.
I am not prepared to invest ~$33 (using a forward diluted PE range of ~32.8 – ~34.1) on the expectation of generating a $1 in additional earnings. In my opinion, investing in a company trading at this level means everything had better go right; BR’s stock price could get pummelled if results do not meet lofty investor expectations.
I have absolutely no idea if, or when, BR will retrace to a more attractive valuation but am prepared to bide my time and to continue to closely follow this company.
Thanks for reading!
Note: I sincerely appreciate the time you took to read this article. Please send any feedback, corrections, or questions to [email protected]
Disclaimer: I have no knowledge of your individual circumstances and am not providing individualized advice or recommendations. I encourage you not to make any investment decision without conducting your own research and due diligence. You should also consult your financial advisor about your specific situation.
Disclosure: I am long BR.
I wrote this article myself and it expresses my own opinions. I am not receiving compensation for it and have no business relationship with any company whose stock is mentioned in this article.
