Jack Henry - Dividend Achiever Review

This Jack Henry Dividend Achiever review looks at whether Jack Henry & Associates, Inc. (JKHY), a company that has increased its dividend annually since February 2004, is currently an attractive investment.

Over the course of several years, there has been an evolution in the term Dividend Achiever. We now have multiple Dividend Achiever Indexes. In a nutshell, however, a Dividend Achiever is a company with a history of enhancing shareholder value through the return of capital to shareholders.

A Dividend Achiever is either listed on the NYSE or the NASDAQ. A company must meet various criteria to become a member of this group as per NASDAQ's Dividend Achievers Index Methodology. The NYSE has similar criteria.

Jack Henry - Dividend Achiever Review - Business Overview

JKHY, founded in 1976, is a provider of products and services that includes processing transactions, automating business processes, and managing information for nearly 8,700 financial institutions and diverse corporate entities.

It provides products and services through its 3 primary business brands.

  1. Jack Henry Banking provides integrated data processing systems to approximately 1,000 banks ranging from community banks to multi-billion-dollar institutions with assets of up to $50B. The number of banks serves continues to decrease due to acquisitions and mergers within the banking industry. These banking solutions support in-house and outsourced operating environments with three functionally distinct core processing platforms and more than 140 integrated complementary solutions.
  2. Symitar provides core data processing solutions for ~840 credit union customers of all sizes. It markets two functionally distinct core processing platforms and more than 100 integrated complementary solutions that support both in-house and outsourced operating environments.
  3. ProfitStars provides highly specialized core agnostic products and services to financial institutions that are primarily not core customers. More than 100 integrated complementary solutions offer highly specialized financial performance, imaging and payments processing, information security and risk management, retail delivery, and online and mobile solutions. Its products and services enhance the performance of traditional financial services organizations of all asset sizes and charters and over 8,600 non-traditional diverse corporate entities including more than 6,800 non-core customers.

JKHY has supplemented its organic growth with 34 strategic acquisitions since the end of fiscal 1999.

A comprehensive overview of JKHY, the industry, customers, business strategy, solutions and the risks are found in Part 1 of the FY2020 10-K. The May 11, 2021 presentation from JKHY's 2021 Analyst conference also contains a wealth of information.

Jack Henry - Dividend Achiever Review - Financials

Q3 and YTD2021 Results

On May 3, 2021, JKHY released Q3 and YTD results.

Mergers and acquisitions are once again a topic among bankers. This is because of increasing confidence about their operating models and the overall economy. Several JKHY clients have approached it to work with them as they prepare to complete acquisitions of smaller institutions.

Consolidated operating margins decreased from 21.4% in Q3 2020 to 21% in Q3 2021. This is primarily due to various revenue headwinds and increased costs. However, on a non-GAAP basis, JKHY's operating margins experienced margin expansion from 18.1% last year to 20.3% this year.

JKHY's payments segment margins were impacted by deconversion fees in Q3. A deconversion fee is imposed even when JKHY's client lives up to all contract terms but simply wishes to end their relationship at the end of the contract term. This fee can be a large lump sum that must be paid to JKHY if the decision is made not to continue with JKHY. This is why bank management must be fully aware of when contracts expire and the ramifications for wanting to migrate to some other system in the future.

On the Q3 earnings call, management states deconversion revenue should decline another ~$4 million in Q4 compared to the previous year. This is a total decrease of ~$37 million in deconversion fees relative to the last fiscal year. There is no immediate merger and acquisition activity that should increase deconversion revenue in the short term. This will negatively impact JKHY's revenue growth for FY2021. However, a decline in this form of revenue is good news from a long-term perspective because it means JKHY is retaining a customer.

Importance of Deferred Revenue

In my recent Cisco post, I  discuss the attractiveness of deferred revenue. This money assists in the financing of operations and can relieve the burden on other assets or reduce the need for financing.

We see from JKHY's Balance Sheet (page 4 of 35 in the Q3 10-Q)  that it has ~$0.141B in short-term revenue. As of FYE 2017 - 2020, JKHY had ~$0.368B, ~$0.370B, ~$0.394B, and ~$0.39B (page 26 of 74 in the FY2020 10-K).

FY2021 Guidance

JKHY's FY2020 results reflect FY2021 GAAP EPS guidance of $3.70 - $3.75. GAAP guidance has been subsequently increased to:

Guidance continues to be based on the assumption the US continues to open up and the economy continues to improve. Guidance will be revised if things change.

Operating Cash Flow (OCF) Free Cash Flow (FCF)

YTD operating cash flow is $~0.266B versus ~$0.276B for the same period in FY2020. This is attributed primarily to the decrease in deconversion fees relative to FY2020.

JKHY has reinvested $116.7 million YTD through CAPEX, purchased software, and computer software developed.

FCF, which is operating cash flow less CAPEX and cap software and the addition of net proceeds from the disposal of assets, is $155.8 million YTD.

Jack Henry - Dividend Achiever Review - Credit Ratings

JKHY is very prudently managed. It does not borrow in the public markets. Therefore, no major rating agency covers the company.

The ~$0.2B of long-term debt on its Balance Sheet as of the end of Q3 (page 4 of 35) is because it borrowed from its revolving credit facility to repurchase shares. Investors should expect earnings from normal business operations to be sufficient to repay this debt.

Jack Henry - Dividend Achiever Review - Dividends and Share Repurchases

Dividend and Dividend Yield

JKHY’s dividend and stock split history is found here. We see annual dividend increases following the company's decision to hold the quarterly dividend at $0.035/quarter/share in 2002 and 2003.

On February 16, 2021, JKHY announced a 7% increase in its quarterly dividend from $0.43/share to $0.46/share.

The current $1.84 annual dividend yield is ~1.2% based on the $154.15 May 28, 2021 share price.

YTD, JKHY has distributed just under $100 million in dividends (page 7 of 35 in the Q3 10-Q).

FY2021 GAAP EPS guidance is $3.98 - $4.02. Based on a $0.46/share/quarter dividend, the dividend payout ratio is ~45.8% - ~46.2%. I view this to be a conservative payout ratio.

Share Repurchases

In October of 2002, JKHY's Board approved the current share buyback program.

The financing of share repurchases is from available cash reserves or short-term borrowings on the company's existing credit facility.

As noted earlier, JKHY drew down $0.2B from its revolving credit facility in Q3 to repurchase 1,825,000 shares; it has purchased 2.5 million shares YTD totalling $384.4 million.

On the Q3 conference call with analysts, management indicates this significant share repurchase does not foreshadow a change in the company's strategy. Management will continue to be opportunistic in its approach to share repurchases when there is excess cash and a lack of acquisition targets that fit the company's strategy.

On May 17, 2021, JKHY announced that its Board has authorized an increase in the remaining .2 million share stock repurchase authorization by another 5.0 million shares. This brings the total current authorization to 5.2 million shares.

Jack Henry - Dividend Achiever Review - Valuation

JKHY reports $3.08 in YTD GAAP EPS as of the end of Q3.

The most recent guidance calls for FY2021 GAAP EPS of $3.98 - $4.02. I am using $4.02 to determine JKHY's current valuation because of the 3 guidance increases in FY2021.

Shares are trading at $154.15 so using FY2021 GAAP EPS of $4.02, JKHY's forward diluted PE is ~38.4.

FY2021 adjusted diluted EPS guidance from 14 brokers is a mean and low/high range of $4.00 and $3.95 - $4.04. Using the high end of the range, the forward adjusted diluted PE is ~38.2.

FY2022 adjusted diluted EPS guidance from 14 brokers is a mean and low/high range of $4.54 and $4.45 - $4.66. Using the high end of the range, the forward adjusted diluted PE is ~33.08.

JKHY's FY2009 - FY2020 PE based on GAAP earnings is 17.94, 19.33, 20.49, 20.88, 27.80, 24.86, 29.24, 27.15, 36.90, 24.95, 40.46, and 41.64.

Jack Henry - Dividend Achiever Review - Final Thoughts

JKHY's business model, track record, and prospects are attractive. However, I am reluctant to acquire shares at the current valuation.

When we acquire shares at a very high valuation there is little margin for error. Furthermore, the probability of margin expansion becomes increasingly difficult.

FY2021 GAAP EPS guidance and FY2022 adjusted diluted EPS guidance have JKHY's current valuation in the upper 30s. JKHY would need to regenerate ~$5.51 in diluted EPS and its share price would need to remain at $154.15 for its forward PE were to drop to ~28. If JKHY generates $4.66 in GAAP EPS and we deem a ~28 PE to be acceptable (even this level is a bit rich), then a share price in the $130s is more reasonable.

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I wish you much success on your journey to financial freedom!

Note: Please send any feedback, corrections, or questions to [email protected].

Disclosure: I do not currently hold a position in JKHY and do not intend to initiate a position within the next 72 hours.

Disclaimer: I do not know your individual circumstances and do not provide individualized advice or recommendations. I encourage you to make investment decisions by conducting your own research and due diligence. Consult your financial advisor about your specific situation.