Thomson Reuters: Paying Higher Dividends For 24 Consecutive Years

Since a high proportion of Thomson Reuters’ revenues are recurring, its revenue patterns are generally more stable compared to other business models that primarily involve one-time product sales.

In other words, the company’s sales are typically slower to decline when conditions worsen, but they are also slower to return to growth when the economy improves. I like these types of stable business models that consistently generate cash.

Thomson Reuters TRI Dividend

Thomson Reuters has also maintained an attractive margin profile over the last decade. Steady sales and high margins are often the sign of an economic moat.

With plenty of recurring revenue, an ability to push through modest price increases, improved profitability from its transformation program, and a gradually expanding platform of products, Thomson Reuters is consistently profitable.

Thomson Reuters TRI Dividend

Looking at the balance sheet, Thomson Reuters’ stable business model allows it to responsibly maintain more debt than most types of companies.

In fact, S&P has issued the company an investment-grade credit rating (BBB+) with a stable outlook.

Thomson Reuters TRI Dividend

Thomson Reuters’ average debt maturity is also 8 years and spread out nicely, which provides plenty of flexibility for the company to meet its obligations.

Thomson Reuters TRI Dividend

Source: Thomson Reuters Earning Presentation

All things considered, Thomson Reuters’ dividend payment appears to be quite safe. The company has a relatively high debt load, but its reasonable payout ratio, high recurring revenue, impressive dividend growth track record, and consistent cash flow all provide nice protection.

Thomson Reuters’ Dividend Growth

Our Dividend Growth Score answers the question, “How fast is the dividend likely to grow?” It considers many of the same fundamental factors as the Safety Score but places more weight on growth-centric metrics like sales and earnings growth and payout ratios. Scores of 50 are average, 75 or higher is very good, and 25 or lower is considered weak.

Thomson Reuters’ Dividend Growth Score is 29, suggesting that the company’s dividend growth potential is below average.

The company’s low score reflects its very low sales growth rate, indebted balance sheet, and management’s preference for small dividend increases in recent years.

As seen below, the company’s dividend has grown between 1% and 2% annually over the last five years.

Thomson Reuters TRI Dividend

Given the company’s target dividend payout ratio of 40% to 50% of its annual free cash flow, I wouldn’t be surprised to see 1-3% annual growth continue until business growth accelerates.

While Thomson Reuters’ dividend growth rate is far from remarkable, it has been consistent. The company has paid out dividends consistently for over 30 years and increased its dividend for 24 consecutive years.

Thomson Reuters is not eligible to join the S&P Dividend Aristocrats Index because it’s not a member of the S&P 500, but it has been a reliable dividend grower.

Valuation

TRI trades at a forward P/E ratio of 18.5, a slight premium to the S&P 500’s forward P/E ratio of 17.8, and offers a dividend yield of 2.9%, which is about in line with its long-term average yield.

For a company with substantial recurring revenue, strong free cash flow generation, and stable business trends, it’s not a big surprise to see its stock trade at a premium valuation multiple.

While the company expects its adjusted earnings per share to grow by 13.5% in 2017, it seems unlikely that this business could generate more than mid-single-digit earnings growth over the long-term.

As a result, TRI’s stock appears to offer annual total return potential of 7% to 10% (2.9% dividend yield plus 4% to 6% annual earnings growth).

Conclusion

Thomson Reuters shares many characteristics with some of the best high dividend stocks in the market. The company has a long history of strong profitability and dependable dividend increases, almost all of its revenue is recurring, and management is taking actions to make the company more competitive.

While Thomson Reuters’ dividend growth rate has been fairly low over the last five years, management’s transformation plan appears to be improving the company’s organic growth, which could translate to faster payout growth over the coming years.

The stock doesn’t look like a bargain today, but it seems like a reasonable long-term hold as the company continues gaining organic growth traction.

 

 

 

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Disclosure: None. 

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