Broadridge (ticker: BR) processes and distributes investor communications for nearly every public company. Those are the proxies and other reports required of all U.S. securities issuers. Broadridge also counts shareholder votes and handles communications around annual meetings and proxy contests.
Its customers are loyal. Last year, 97% of Broadridge’s fee-paying business was renewed. Whether the stock market is up, down, or going sideways, firms must communicate with shareholders and distribute the reports mandated by the Securities and Exchange Commission and other regulators. Broadridge’s pitch is that it makes the process simpler and cheaper, through its scale, expertise, and existing connections to millions of global investors.
For years, Broadridge’s name has been on the thick envelopes sent to shareholders, but the company is making a digital transition. Nearly 60% of its mailings are now digital. For Broadridge, digital distribution carries similar fees without the associated shipping costs.
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In its current fiscal year, ending in June, Broadridge sales are forecast to grow 3.9%, to $4.53 billion. Profits are rising faster, helped by more generous digital margins. For fiscal 2020, Wall Street expects Broadridge to make $5.13 a share, 10% above fiscal 2019’s level.
As earnings have grown, Broadridge has delivered double-digit dividend increases for eight consecutive years, while maintaining a payout ratio below 50%. The stock now yields 1.8%, about equal to the 10-year U.S. treasury note. “Broadridge is one of the best dividend growth stocks you’ve never heard of,” says Evercore ISI analyst David Togut.
At a recent $119.80, Broadridge trades at 22 times next year’s earnings estimate, in line with its five-year average. Togut has a target price of $145—25 times his 2021 earnings-per-share forecast—suggesting more than 20% upside for the stock.
Unlike much of the financial services industry, Broadridge’s business is insulated from volatility.
“They’re very much involved in the capital markets, but they’re not as exposed to the fluctuations of the capital markets,” says Allen Bond, a portfolio manager at Jensen Investment Management, which oversees nearly $10 billion and owns about $180 million worth of Broadridge shares. “Their business is really more a function of the overall holdings of stocks, ETFs, mutual funds–as opposed to the level of the stock market.”
In 2009, the worst year of the global financial crisis, S&P 500 revenues were down 11%, while Broadridge’s sales were essentially flat.
*Fiscal years end June; E= Estimate
Investor communications make up about 80% of the company’s revenue. Its other, faster-growing operation provides back-office functions for investment banks, asset managers, and broker-dealers—services such as trade-processing, record-keeping, compliance, and regulatory reporting. They’re not glamorous or splashy activities, but they are a key part of the financial world’s plumbing. Broadridge clears and settles $7 trillion a day in equity and fixed-income trades across 90 countries.
“Our moat is our scale in each area, with the reinforcing benefit of the expertise and knowledge we have in each niche,” says CEO Tim Gokey.
Broadridge is benefiting from fee compression across the financial services industry. Brokerages and big banks are seeking to reduce costs, and outsourcing undifferentiated-but-necessary functions to Broadridge checks that box.
“Broadridge can do it faster, better, cheaper,” says Togut, who rates the stock Outperform. “…where 10 years ago, big brokerage firms thought that trade technology was proprietary to their business, they now realize that cost reduction is more important. And they get modern technology with Broadridge, to boot.”
Wealth managers are recognizing the value of Broadridge’s wide assortment of products.
for example, is working with the company to create a new wealth-management software platform. “There are a lot of processes that we perform that are the exactly the same as all of our competitors,” says Thomas Giacalone, a managing director at UBS. “You need to do them and you need to do them right, but they’re not a source of competitive advantage.”
Broadridge’s solid balance sheet gives it the flexibility to make acquisitions that boost growth. The company has made seven in 2019 alone, including a provider of compensation and compliance tools for financial advisors and a firm that handles clearing and settlement around exchange-traded derivatives and cryptocurrencies.
Broadridge’s net debt to Ebitda, or earnings before interest, taxes, depreciation, and amortization, is 1.8 times, just below the S&P 500 average.
But ultimately, it’s the mail that should keep the company thriving in any market. No one knows when a slowdown will arrive, but those proxy packages will still show up—in snow, rain, or bear markets.
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