Between early May and mid-July, investors had a window of opportunity to acquire reasonably valued Broadridge (BR) shares; I added to my exposure on May 9 @ $138.43 in a 'Core' account in the FFJ Portfolio. On August 12, however, BR released its Q4 and FY2022 results and in my post of the same date, I conclude:
'In several posts in May - July, I mention that we are being presented with a 'window of opportunity' to acquire shares in wonderful companies at reasonable valuations. I cautioned that this 'window' could close in the not too distant future.
Regrettably, this is what we are witnessing. BR's share price, for example, is now trading at ~$183. That is ~$44.60 higher than my May 9 purchase. Crazy considering the business has not fundamentally changed in under 4 months!
In the short run, the market is a voting machine. In the long run, however, it is a weighing machine. BR's share price could continue to rise in the short term. An event of some magnitude, however, is highly likely to occur at some point at which time I envision BR's valuation becoming more attractive. That is when I want to add to my BR exposure.'
As luck would have it, BR's share price started to tumble almost immediately following that post.
Now we have Q1 2023 results that were released on November 2, updated earnings estimates from the few brokers which cover BR, and a ~$143 share price (~$40 lower than at the time of my prior review).
Q1 2023 Results
I dispense with a review of Q1 results but provide links to Q1 materials and BR's November 15 Investor Presentation.
- Investor Presentation
- Q1 2023 Earnings Presentation
- Q1 2023 Form 8-K Earnings Release
- Q1 2023 Form 10-Q
The very nature of BR's business is such that it is extremely difficult to compare BR's financial condition, results of operations, and cash flows on a fiscal quarter-by-quarter basis.
The processing and distribution of proxy materials and annual reports to investors comprise a large portion of BR's Investor Communication Solutions business. It processes and distributes the greatest number of proxy materials and annual reports during its Q3 and Q4 (its fiscal YE is the end of June); the recurring periodic activity of this business is linked to significant filing deadlines imposed by law on public reporting companies. As a result, BR's revenues, operating income, net earnings, and cash flows from operating activities are typically higher in Q3 and Q4. Investors, should not, therefore, be alarmed by BR's negative Free Cash Flow in Q1 2023.
BR's FY2023 guidance remains unchanged from my last review.
Note 10 entitled 'Borrowings' in the Q1 2023 Form 10-Q (page 19 of 53) provides a good overview of BR's credit arrangements.
The following schedule as of FYE2022 is provided for comparison purposes.
On the Q1 2023 earnings call, management indicated that as free cash flow improves over the remainder of FY2023, the focus in the near term is debt reduction; maintaining an investment-grade credit rating is a top priority. BR's leverage is higher than historical levels and the plan is to reduce the debt to a more sustainable level. As free cash flow conversion increases going into FY2023, BR expects to have more capacity to return capital to shareholders and to think about other investments (eg. tuck-in acquisitions).
All BR's domestic senior unsecured debt ratings are at the top tier of the lower-medium grade investment-grade category. There is no change from the time of my last review.
- Moody's: Baa1 with a negative outlook;
- S&P Global: BBB+ with a negative outlook;
- Fitch: BBB+ and a stable outlook.
These ratings define BR as having an ADEQUATE capacity to meet its financial commitments. Adverse economic conditions or changing circumstances, however, are more likely to lead to a weakened capacity of the obligor to meet its financial commitments.
I view BR's credit risk as acceptable for my purposes.
Dividend and Dividend Yield
At the time of my August 12 post, BR had just declared a $0.725/share quarterly dividend payable on October 5 to stockholders of record on September 15. This represented a ~13% increase from $2.56 to $2.90/share ($0.64/quarter to $0.725/quarter). This increase marked BR's 16th consecutive year of dividend increases since becoming a public company in 2007.
With shares trading at ~$183, the dividend yield was ~1.6%.
BR's next $0.725 dividend is to be distributed on January 5, 2023 to stockholders of record at the close of business on December 15.
With shares trading at ~$143, the dividend yield is ~2%.
At the time of my August post, BR's FY2023 guidance included a diluted EPS forecast of ~13 - ~17% growth. FY2022 diluted EPS was $4.55 thus giving us an FY2023 range of ~$5.14 - ~$5.32. Shares were trading at ~$183 for an FY2023 diluted PE range of ~34.3 - ~35.6. In contrast, BR's diluted PE in FY2012 - FY2021 was 21.58, 20.69, 22.86, 22.96, 26.21, 31.89, 25.46, 31.68, 38.01, and 39.2.
BR's FY2022 adjusted diluted EPS was $6.46. With management's FY2023 7 - 11% adjusted EPS growth guidance the adjusted diluted EPS was ~$6.91 - ~$7.17 for an FY2023 adjusted diluted PE range of ~25.5 - ~26.5.
Broker guidance had yet to be fully updated. However, based on existing estimates, BR's valuation was:
- FY2023 - 6 brokers - mean of $7.06 and low/high of $6.88 - $7.28. Using the mean, the forward adjusted diluted PE is ~26.
- FY2024 - 3 brokers - mean of $7.51 and low/high of $7.45 - $7.62. Using the mean, the forward adjusted diluted PE was ~24.4.
- FY2025 - 1 broker - mean of $8.05 and low/high of $8.05 - $8.05. Using the mean, the forward adjusted diluted PE was ~22.7.
BR's FY2023 guidance remains unchanged from August. The FY2023 Diluted EPS range of ~$5.14 - ~$5.32 and the current ~$143 share price give us an FY2023 diluted PE range of ~26.9 - ~27.8.
Management's adjusted diluted EPS guidance is ~$6.91 - ~$7.17. Using a ~$143 share price, the FY2023 adjusted diluted PE range is ~20 - ~20.7.
BR's valuation using the current ~$143 share price and current broker guidance is:
- FY2023 - 5 brokers - mean of $6.97 and low/high of $6.88 - $7.02. Using the mean, the forward adjusted diluted PE is ~20.5.
- FY2024 - 4 brokers - mean of $7.52 and low/high of $7.39 - $7.65. Using the mean, the forward adjusted diluted PE was ~19.
- FY2025 - 2 brokers - mean of $8.27 and low/high of $8.25 - $8.29. Using the mean, the forward adjusted diluted PE was ~17.3.
BR's valuation is far more reasonable than 3 months ago!
Making investment decisions based solely on stock price is a 'fool's game'. In BR, we have an example of how nothing about the business has changed within 3 months yet its valuation is much improved simply because of investor sentiment.
I currently hold 282 BR shares in a 'Core' account and 539 BR shares in a 'Side' account in the FFJ Portfolio. Additional BR shares are also held in a retirement account for which I do not disclose details. I would acquire additional BR shares at the current valuation but much of my liquidity was deployed toward the recent purchase of a second home. In addition, within the last few days, I acquired shares in West Pharmaceutical (WST) and CME Group (CME). I am, therefore, in no position to add to my BR exposure.
I wish you much success on your journey to financial freedom!
Note: Please send any feedback, corrections, or questions to [email protected].
Disclosure: I am long BR, WST, and CME.
Disclaimer: I do not know your circumstances and do not provide individualized advice or recommendations. I encourage you to make investment decisions by conducting your research and due diligence. Consult your financial advisor about your specific situation.
I wrote this article myself and it expresses my own opinions. I do not receive compensation for it and have no business relationship with any company mentioned in this article.