Thomson Reuters: Paying Higher Dividends For 24 Consecutive Years

Thomson Reuters has even stated that it probably has more company data than any other corporation in the world.

Customer contracts serve as another barrier to entry, although the majority of them are up for renewal every year. Despite the relatively short contract arrangements, Thomson Reuters’ existing customers would need to be willing to take a chance on a lesser-known vendor to part ways with the firm.

Such a move could reasonably be deemed as “too risky” in many cases given the importance of customers’ workflows and their decision-making processes that have grown dependent on Thomson Reuters’ solutions. As a result of customers’ reliance on its solutions, Thomson Reuters has generally enjoyed annual price increases in the low single-digit range, which provide a nice recurring lift to profits.

The company’s continuously improving breadth, content, and capabilities help justify the price hikes and further strengthen long-term customer retention rates, which have historically hovered near 90% in its Financial & Risk segment.

Thanks to Thomson Reuters’ recurring revenue, relatively fixed cost base, economies of scale, decent pricing power, healthy customer retention, and business diversification (no customer is greater than 2% of revenues), the company has been a consistent free cash flow generator over the years:

Thomson Reuters TRI Dividend

Source: Simply Safe Dividends

Despite its strengths, the company has faced headwinds resulting from its acquisition spree, which saw the firm acquire close to 300 companies from 2003 through 2013 (most notably its $17 billion merger with Reuters in April 2008).

These deals brought a growing mass of unrelated businesses, and soft customer growth trends following the financial crisis caused further challenges The Reuters acquisition in particular was challenging as it caused a number of cultural issues, disappointing product launches, high employee turnover, and organizational complexities.

As a result, Thomson Reuters put together a turnaround plan in late 2013 to restore organic growth, simplify operations, capture true economies of scale, rely less on acquisitions, and improve profitability.

Thomson Reuters essentially acknowledged that its acquisition strategy resulted in a complicated infrastructure, an overgrown portfolio of products rather than an integrated enterprise, and a big company that wasn’t taking advantage of its scale.

The management team has now slowed down on acquisitions (16 acquisitions during 2014-2016 vs. 97 between 2011 and 2013). It also sold off its Intellectual Property & Science segment (close to 10% of sales) to focus more on its core businesses.

As a result, Thomson Reuters has successfully registered its second consecutive year of organic growth in 2016 while improving its margins.

Thomson Reuters TRI Dividend

Source: Thomson Reuters Investor Presentation

The company’s new strategy focuses on an enterprise approach rather than a portfolio approach and drives attractive returns while maintaining a strong capital structure.

This enables organic revenue growth, which achieves savings from simplifying processes and reinvesting in growing businesses. Thomson Reuters is also targeting a return on invested capital above cost of capital for the first time since 2007.

Thomson Reuters TRI Dividend

Thomson Reuters has engaged in various simplification and productivity initiatives that have strengthened its core. The company founded Enterprise Technology & Operations (ET&O) at the beginning of 2016, unifying more than 10 functions into a single Enterprise team, for example.

The company has also retired 110 legacy applications, closed a number of data centers, reduced its workforce by 25% since 2012, and consolidated 62 office locations to 230 locations from 520 in 2012. Thomson Reuters is simplifying its product portfolio as well by reducing the number of products by roughly 70% in the Financial & Risk segment alone.

These transformational programs are designed to drive growth, improved retention, and efficiencies by accelerating organic growth and productivity gains.

Thomson Reuters TRI Dividend

As Thomson Reuters continues simplifying and unifying its products while divesting non-core businesses, it hopes to show a meaningfully improved organic growth rate this year and beyond.

As seen below, the firm is looking to generate 60% of its sales from “Growth” segments, such as Risk, Elektron Data Platform, Legal Software & Services and Global Tax, in 2017, up from just 48% in 2012.

The company expects to see its growth profile gradually improve as well as it allocates capital into faster-growing adjacent markets outside of its financial and legal research businesses.

Thomson Reuters TRI Dividend

Source: Thomson Reuters Investor Presentation

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Disclosure: None. 

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