Thanks to @SWPhilosophy for the excellent suggestion.
Broadridge is a financial services solutions provider, you wouldn’t approach them directly as a retail investor, but a company you use, or product you invest through might be leveraging their solutions. I like financial companies and analysing them but we’ll see if this one makes for a good investment too!
What Does Broadridge Do?
This company is selling the picks and wheelbarrows during a gold rush. Rather than being directly involved in financial services, they facilitate the industry by managing the admin and process side of things. For instance, being able to process all your client trading activity for marketing reports doesn’t make the customers’ lives better, but it helps your business. They want to take on the non-IP aspects of your business which might be better served by being outsourced or by buying off the shelve solutions.
If you work in the industry you might have heard of Broadridge, they brought FundsLibrary this year, which was the Hargreaves Lansdown spin-off because they couldn’t get reliable fund information.
If you go through Broadridge’s existing solutions they pretty much do anything you can think of when serving banks, broker-dealers,
asset management firms, mutual funds, corporate issuers, or wealth management firms. To help explain things, they group their business into two main segments.
Source: Q3 2020 Report
Investor Communication Solutions, this aspect of the business focuses on proxy voting and corporate actions with securities. Every time there is a vote on one of your stocks, they pay out a dividend, or a new announcement needs to be communicated, you need a system to manage this all. Think of this as a CRM (customer relation management) tool or a customer portal but on steroids. As such they have a few non-financial clients with these solutions where they need to manage official communications with a full audit. If the words blockchain just flashed into your head then you might like this company. Anything and everything to do with communication with customers or shareholders fall into this segment.
Global Technology and Operations, if you have ever heard of the phrase trade lifecycle you’ll know there is a lot of legwork that happens whenever you press that execute trade button. This business line focuses on the technology in the back and middle office, either SaaS solutions for processing trades and managing them or websites that a brokers’ operational staff would use to make sure everything is processing correctly. Additionally, this segment also does white labelling of wealth management services. If you want to run a wealth management firm but wanted to just focus on bringing in the clients you could do that with Broadridge and give everything else to them.
Broadridge pitch themselves as a software business, and a fintech. They don’t see themselves as a financial firm, and their financial statements reflect that. This is a business like SAP or Slack, a technology firm with a specialism. In Broadridge’s case that specialism processed on average over $7 trillion in equity and fixed income trades per day of U.S. and Canadian securities, not bad for a fintech.
How Are The Finances?
Let’s take a look at the financial aspects of Broadridge and start looking at their fundamentals.
Source: Genuine Impact
For a technology company, Broadridge has a strong quality score. I wanted to dive into this number a bit more as I know financial companies do have padded balance sheets (for regulatory purposes) but that shouldn’t be the case here.
Source: Wallmine Broadridge
Through a combination of a very strong sticky core product, a targetted annual 8-10% increase in recurring revenue, multiple business acquisitions, and a punchy $4.38bn in revenue a year, Broadridge have some solid foundations to build upon.
I was, however, very disappointed in a 28.2% gross margin. This number does bounce around a lot as well which isn’t a good sign. If your business is spending 70%~ of the revenue you make to make those sales, that doesn’t leave a lot left over.
Flipping this on its head is the profit margin. A very comfortable 11.05%. This means outside of the core spending to generate revenue, the business is fairly lean. Depending on your view of tech stocks you either want an ungodly amount of R&D spending (which is not present) or aggressive acquisitions. In 2019 Broadridge picked up Rockall, a provider of SBL and collateral management solutions for wealth management firms and commercial banks, RPM, a leading Canadian provider of enterprise wealth management software solutions and services, and the retirement plan custody and trust assets from TD Ameritrade.
Seems their growth strategy is to get a big enough war chest to simply buy any disruption or new business operation rather than incur heavy R&D expenses.
Is This A Value Purchase?
While I wouldn’t go running for the hills in terms of valuation, it’s not particularly attractive either. Think of an unkept ageing dog, not offputting but you wouldn’t get too close either.
Source: TradingView Broadridge
Skipping to a bit of technical analysis we can see the price has stalled somewhat, and the trend has been creeping downward. Looking at the fundamentals this is slightly overvalued still. With a P/E of 32.26, and a Price to Book of 11.99, these are high for any value hunter.
It’s worth saying it’s not as aggressive as a “typical” tech company but Broadridge walks the line of SaaS vendor and financial operator.
What Do The Analysts Think?
Given how muted I have been and for every strong aspect of the fundamentals, we see something just as offputting. It’s only fitting that we have an even split when it comes to the analyst views.
Source: Genuine Impact
Digging into this some more the rating is overweight, not quiet at a buy yet but better than a hold. No one is advising a sell at least.
While the revenue and EPS growth look attractive, they are very much expected at this point. The business is very reliable and stable. The acquisitions are signposted and clear fits and the business deals with slow-moving large financial institutions are also as predictable.
Source: Wallmine Broadridge
The target price is also on the lower end of things in percentage terms. With a large spread (a few negative predictions even at a hold rating) and no strong conviction, I don’t see too much hope in the target prices.
It’s not an exciting company that is going to come out with the proxy voter 3,000 and change financial services as we know it. This is the charm but also the negative mark. They have the balance sheet of a tech company but move like a financial one.
Will I Get Paid?
What might sway you is the dividend. Not only is this a dividend-paying darling but it’s an extremely reliable one. 12 non-stop years of dividend growth, which is paid quarterly, and has increased by 17.61% in the last three years.
Source: Genuine Impact
Like all things with Broadridge the dividend is on the lower end of what it could be. Even with an incredible 57.99% of earnings being paid out as dividends, we are left with a weak 1.80% dividend yield.
Any dividend hunters will likely find Broadridge but move onto a higher-yielding prospect.
Why A Hold?
If you already hold Broadridge I wouldn’t sell them just yet. You have a growing dividend and the potential at some more price recovery as well as some more future acquisitions to look forward to.
Some financial service firms have done very well during the lockdown, and with trading volatility up this will be a benefit to some of their clients. Broadridge is one of the few companies who have kept their 2021 targets regardless of COVID-19.
If you haven’t heard of, or invested in Broadridge, your capital can be deployed elsewhere to have a more meaningful impact. If this was a service provider to the financial industry whos’ price was showing an upward trend with the growing dividend, that would be a far more exciting prospect.
Right now this is one to watch but I wouldn’t be in a rush to enter into a trade just yet.
Thanks for reading! Let me know what you thought, is Broadridge a company you had heard of, or one you are currently holding?
If you have any more great suggestions of companies or funds to look at, don’t keep them to yourself.