Thomson Reuters: Paying Higher Dividends For 24 Consecutive Years

By relying more on organic growth rather than M&A, the company is also holding onto more cash to return to shareholders in the form of repurchases and dividends.

For example, Thomson Reuters completed 16 acquisitions between 2014 and 2016 for a cost of $316 million, which is significantly less than the 97 acquisitions made during 2011-2013 for a cost of $3.8 billion.

Thomson Reuters TRI Dividend

Source: Thomson Reuters Earning Presentation

Through a combination of cost efficiency gains and incremental revenue growth (recall that Thomson Reuters’ cost base is largely fixed), the firm should be poised for stronger earnings growth in the years ahead.

Key Risks

Although Thomson Reuters has considerably reduced its number of acquisitions and is showing good progress on its 2017 plan, the company still faces a handful of risks.

Many of Thomson Reuters’ markets are increasingly tech-driven, for example. Data is becoming cheaper, information is more accessible than ever before, and low technology costs (e.g. the cloud) have resulted in thousands of fin-tech startups trying to disrupt the old incumbents like Thomson, Bloomberg, and LexisNexis.

These trends, which encourage more competition and innovation, will likely only intensify in the coming years.

Additionally, some of Thomson Reuter’s larger markets (e.g. banks, law firms) are struggling to grow headcounts due to heightened regulatory scrutiny and challenging economic conditions.

Market saturation could lead to intensified competition and pricing pressures, making it all the more important for Thomson Reuters to stay ahead of customers’ evolving needs to maintain its strong market share and profitability.

The company still appears to have a large advantage as the incumbent, but smaller players will always be much faster-moving and quicker to adapt new, potentially disruptive technologies to further unlock the flow of valuable information.

If competitors begin eroding Thomson Reuters’ moat, it seems reasonable to expect a company as large as Thomson to struggle with generating profitable organic sales growth. As of today, however, the business appears to be performing well overall.

Thomson Reuters has delivered positive organic revenue growth for two consecutive years, for example, and the company’s Financial business has continued recording revenue growth over the past year.

The Legal business has also seen its revenues grow (albeit modestly) despite declining U.S. print and transaction sales. Macro conditions have been strengthening, but the firm’s initiatives have been driving some of the improvement in profitability and productivity.

Thomson Reuters’ Dividend Safety

We analyze 25+ years of dividend data and 10+ years of fundamental data to understand the safety and growth prospects of a dividend.

Our Dividend Safety Score answers the question, “Is the current dividend payment safe?” We look at some of the most important financial factors such as current and historical EPS and FCF payout ratios, debt levels, free cash flow generation, industry cyclicality, ROIC trends, and more.

Dividend Safety Scores range from 0 to 100, and conservative dividend investors should stick with firms that score at least 60. Since tracking the data, companies cutting their dividends had an average Dividend Safety Score below 20 at the time of their dividend reduction announcements.

We wrote a detailed analysis reviewing how Dividend Safety Scores are calculated, what their real-time track record has been, and how to use them for your portfolio here.

Thomson Reuter’s Dividend Safety Score of 89 suggests that its dividend is very safe.

The company’s dividend is first supported by the firm’s payout ratio. As you can see below, the company’s free cash flow payout ratio has increased over the last decade from about 35% in 2006 to 50-60% more recently.

The firm’s payout ratio is expected to be around 60% this year, which is in line with recent years. Given the steadiness of Thomson Reuters’ cash flow, this is a very reasonable payout ratio.

Thomson Reuters TRI Dividend

Looking at a company’s performance during the financial crisis can also be helpful when evaluating the safety of its dividend payment. If earnings are highly cyclical, the company has greater risk of needing to freeze or cut its dividend if conditions unexpectedly deteriorate.

Thomson Reuters’ reported results are skewed higher because of its acquisition of Reuters, which closed in April 2008.

Adjusting for the acquisition and currency headwinds, the company’s sales rose in 2008 and edged down by just 1% in 2009 despite meaningful weakness across many of its financial services customers. The company’s stock also outperformed the S&P 500 by 12% in 2008.

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Disclosure: None. 

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