Dividend Kings In Focus: Computer Services

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Each year, we individually review all the Dividend Kings. The next in the series is Computer Services (CSVI).

Computer Services has increased its dividend for 50 consecutive years, including its most recent raise of 8% in July 2021. This article will analyze the company in greater detail.

Business Overview

Computer Services provides regional banks with a wide range of services, such as core processing, digital banking, payments processing, and regulatory compliance solutions. It has a market cap of $1.4 billion, making it a small-cap stock.

The company operates two major segments, Enterprise Banking and Business Solutions. The Enterprise Banking Group is the larger segment, comprising roughly 62% of total company revenue.

On May 4th 2022, the company reported fiscal fourth-quarter and fiscal year results. Fourth quarter revenues rose 7.2% to $81.0 million. Net income rose 23.7% to $16.7 million, while earnings-per-share increased 24.5% to $0.61 for the fiscal fourth quarter.

For the full fiscal year, CSI’s revenues rose 8.7% to $316.6 million. Net income for fiscal 2022 was $61.9 million, an 11.6% increase. Earnings-per-share increased 11.9% to $2.25, compared with $2.01 in the prior fiscal year.

Growth came from a variety of factors including new customer additions, cross sales to existing customers, higher transaction volumes, digital banking growth, and growth in regulatory compliance services.

Growth was broad-based across both core segments. Enterprise Banking Group revenues rose 9.9% to $196.6 million for the year, while Business Solutions Group revenues rose 6.8% to $120.1 million during fiscal 2022.

Growth Prospects

Computer Services has grown its sales, earnings, and its dividend for 22, 25, and 50 consecutive years, respectively. Thanks to strong business momentum, management expects to post new all-time highs in the above metrics this year.

Computer Services has grown its earnings-per-share at a 10.2% average annual rate over the last decade. The pandemic has not affected the performance of Computer Services at all.

The impressive growth record of Computer Services is a testament to the strength of its business model. The company signs multi-year contracts with its customers and offers them a wide range of services. It is thus very costly and inefficient for these customers to stop working with the company, particularly given that they pay appreciable early termination fees.

As a result, Computer Services enjoys high renewal rates. In fact, when it loses a customer, the most frequent reason is that the bank has been acquired by another bank that is not a customer of Computer Services.

Thanks to sustained momentum in the core business and no signs of fatigue, we expect it to grow its earnings-per-share by 8.0% per year over the next five years.

Competitive Advantages & Recession Performance

Thanks to its long-term contracts and the recurring nature of its revenues, Computer Services is resilient during
recessions. In the Great Recession, it grew its earnings-per-share by 17% in 2008 and another 19% in 2009. On the other hand, its price-to-earnings ratio steeply declined in the Great Recession, when the stock lost half of its market cap in a year.

The company proved resilient once gain in the coronavirus crisis, as it posted all-time high revenues and earnings. Those who can focus on the underlying performance and ignore the stock price gyrations could see the company rebound after an economic downturn.

Earnings-per-share performance during the Great Recession is below:

  • 2008 earnings-per-share of $1.10
  • 2009 earnings-per-share of $1.31 (19% increase)
  • 2010 earnings-per-share of $1.43 (9% increase)

It is highly impressive that the company remained profitable and grew EPS each year during the Great Recession. This allowed it to continue increasing its dividend each year during the recession, even when earnings declined. And, thanks to its strong product portfolio, the company kept growing after 2010.

Its resilience held during the coronavirus pandemic. In 2020, Computer Services signed 24 new core partnerships and achieved a 95% retention rate in long-term contracts. This is a testament to its strong business model, which proved resilient in a severe downturn.

Valuation & Expected Returns

Using the current share price of ~$50 and expected earnings-per-share of $2.43 for the upcoming fiscal year, CSVI stock trades for a price-to-earnings ratio of 20.6. Over the past 10 years the stock has held an average P/E ratio of 17.4. This is our fair value multiple.

However, with a forward P/E ratio of 20.6, this implies the possibility of a valuation headwind over the intermediate term. Returning to our target price-to-earnings ratio by 2027 would reduce annual returns by 3.3% over this period of time.

Aside from changes in the price-to-earnings multiple, future returns will be driven by earnings growth and dividends.

We expect 8% annual earnings growth over the next five years. In addition, CSVI stock has a current dividend yield of 2.1%.

Total returns could consist of the following:

  • 8.0% earnings growth
  • -3.3% multiple reversion
  • 2.1% dividend yield

Computer Services stock is expected to return 6.8% per year through 2027. As a result, we have a hold recommendation on the stock, though the company’s ability to raise dividends through multiple recessions is impressive.

Final Thoughts

Computer Services has an exceptional growth record and has a positive future outlook. However, the stock has become over valued. As a result, it may offer mid-single-digit returns over the next five years.

The stock could also have significant downside risk whenever it faces an unexpected headwind or recession, although the business is likely to hold up well as it has during previous recessions. Therefore, shares earn a hold rating.

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