Koh Sze Kiat
Introduction
Broadridge Financial Solutions (NYSE:BR) provides investor communication solutions, securities processing and operations outsourcing (and front-to-back transaction lifecycle automation), data analytics solutions and asset management solutions. Its clients include various banks, broker-dealers, mutual funds, hedge funds and others in the financial industry. Longtime Automatic Data Processing (ADP) investors will know Broadridge Financial because it was a division of the company before it went public in 2007.
Its share price has risen since then and far exceeds the total return of the S&P500. Investors who bought the stock 10 years ago have high returns of 582% (averaging 21% per year). Sales and earnings have risen sharply, but the stock’s valuation does not appear to be up to par. The stock is definitely worth buying at a lower price level.
Strong Earnings Growth
The most recent quarterly filing concerns the results for the second quarter of fiscal 2023, which ended in December 2022. Broadridge presented strong growth figures: recurring revenues were up 8% at constant currency and adjusted earnings per share were up 11%. More than 93% of revenues are recurring, providing the company with a secure revenue stream.
The equity position also grew strongly by 9% and the ETF/Mutual Fund position grew by 6%. I think this is a strong performance given that the market fell significantly last year and equity markets rose slightly in the quarter. Investors should still be cautious as the market is currently volatile due to rising interest rates.
Q2’23 Highlights (Broadridge 2Q23 Investor Presentation)
Recurring revenues in ICS (government solutions) grew strongly by 10%, mainly due to growth in the Fund Solutions and Customer Communications divisions. Growth was also strong in GTO, with capital markets revenues up 12%. In Wealth & Investment Management, however, revenues fell 3% due to changing investor interest. Overall, GTO’s recurring revenues were up 6%.
Broadridge offered a strong but unchanged outlook for fiscal 2023. Recurring revenue growth is expected to be between 6% and 9%, and the adjusted EPS growth is expected to be between 7% and 11%.
ICS and GTO Revenues (Broadridge 2Q23 Investor Presentation)
Dividends And Share Repurchases
Broadridge Financial Solutions’ dividend has grown very strongly over the past 10 years, averaging 14.9% per year. Currently, the dividend yield is 2.1% and the dividend rate is $2.90. Analysts expect the dividend to rise to $3.05 in fiscal 2024, this represents an increase of 5.2%.
Dividend growth history (Seeking Alpha BR ticker page)
From their financial flow statements, we can see that the company is also repurchasing shares. While the share buyback program was large in 2018 and 2019, it will now amount to $23 million (buyback return of 0.1%) in fiscal year 2022.
Its total shareholder return (dividends plus share buybacks) reaches 85% of free cash flow during fiscal 2022, indicating that shareholder incentive programs are sustainable in the long run.
Broadridge’s cash flow highlights (SEC and author’s own calculations)
The Stock Is Clearly Overvalued
Now we come to the stock’s valuation metrics. The PE ratio is a common measure of stock valuation, and I also want to introduce the EV/FCF ratio, because it includes cash and debt in the share valuation.
First, I will discuss the PE ratio. The PE ratio is shown in the chart below, which was provided by YCharts. There is a difference between the YCharts’ figure and Seeking Alpha’s. YCharts’ PE ratio is the GAAP PE ratio, which is 30.6 (quite high). And Seeking Alpha’s PE ratio is the non-GAAP PE ratio, which is currently 19.7. This ratio alone does not give me enough insight into the valuation, so I compare it to its historical valuation first.
To get insight into its historical valuation, the 3-year average PE ratio appears to be a good choice because it takes recent market conditions into consideration. Currently the GAAP PE ratio stands at 31, and the chart shows that the 3-year average PE ratio is about 34, indicating a low undervaluation here. However, the PE ratio has increased significantly over the past 10 years, so I don’t think this is a good comparison.
Also, to compare the PE ratio with the general market. The S&P500’s PE ratio stands currently at 21, so Broadridge seems a bit overvalued at the moment. What about the near future?
Seeking Alpha provides insight from analysts and 7 analysts expect non-GAAP EPS to rise in high-teens in the coming years. Therefore, the company’s non-GAAP PE ratio looks favorable at a level of only 16.5 in fiscal 2025. So is the company favorably valued or expensive?
Broadridge Earnings Estimates (Seeking Alpha BR ticker page)
If we include cash and debt in the equation, we see that the ratio of enterprise value to free cash flow is extremely high at 53. That ratio has risen sharply over the years, indicating that investors have higher expectations than the company could increase its earnings. So yes, I would tentatively say that the company is overvalued.
Conclusion
Broadridge Financial Solutions is a steadily growing financial solutions provider for various banks, broker-dealers, mutual funds and so on. The stock price has shown tremendous returns with a 10-year average annual return of 21%. Broadridge has greatly increased its revenues and profits during this period. And because 93% of revenues are recurring, Broadridge is a safe player that can weather recessions well. Recent quarterly results show that recurring revenue at constant currency increased 8% and adjusted earnings per share increased 11%. Although markets have been volatile, Broadridge continues to perform strongly. For fiscal 2023, Broadridge expects recurring revenue growth between 6% and 9% and adjusted earnings per share between 7% and 11%.
The dividend per share is up about 15% annually. The dividend yield is 2.1% and analysts expect the dividend to rise 5.2% this year. The dividend (and share repurchases) is sustainable over the long term as it represents only 85% of free cash flow. However, the stock’s valuation (GAAP PE ratio of 31 and EV/FCF ratio of 53) is clearly overvalued. Broadridge is doing well and expects strong growth, but the expensive valuation prevents me from opening a position. When the stock price moves in a favorable direction, I will open a position in Broadridge.
