Jack Henry & Associates (JKHY) is a mid-cap company that offers above-average growth of capital and an increasing dividend income stream. Since 1990 they have grown earnings at a compound average rate of 18.2%. Consistent with this earnings growth they have increased their dividend each year at approximately the same rate as earnings growth. Jack Henry raised their dividend from $0.04 (4 cents) a share in fiscal 1996, to currently paying $0.32 (32 cents) a share for fiscal 2009, and have increased their dividend again for fiscal 2010. See figures 1 and 2 below, yellow shaded areas. (Note our charts calculate fiscal year end numbers.)
Figure 1. 15yr EPS Growth and Dividends correlated with Price
Figure 2. 15yr Dividend and Price Performance
Lessons in Valuation versus Volatility
The price action for Jack Henry depicted in Figure 1 provides fascinating insights into investor psychology. What can be learned from this graph is the unpredictability of volatility (price movement) versus the importance of valuation. Over short periods of time, price movement can be totally random and irrational. However, True Worth™ valuation will inevitability manifest. Therefore, it’s critical that the long-term prudent investor calculates intrinsic value first and then measures current valuation against the more reliable metric of True Worth™ valuation.
Buy, Sell or Hold Based on Valuation
If the current price is overvalued relative to True Worth™ then we recommend either avoiding or selling if you already own the company (see years 2000-2002 in figure 1). If the price is fairly valued then we recommend buying or continuing to hold. Finally, if price is below intrinsic value (see year 2000 in figure 1) then we recommend either buying aggressively or at least holding. However, we recommend never selling an undervalued company. This is why we eschew stop losses. We make buy or sell decisions based on fundamentals rather than price volatility.
Jack Henry & Associates headquartered in Monett, Missouri was founded in 1976. From humble beginnings and conservative mid-western values they started out as a provider of information processing solutions for local community banks. Today they serve a nationwide client base of close to 9000 financial institutions and corporate entities.
Jack Henry has no debt on their balance sheet and offers an attractive 1.5% dividend yield that is expected to grow. Based on original cost basis, as the dividend is increased, your yield will increase as well. This is what we mean by growth yield.
Jack Henry generates strong cash flows, higher then earnings per share, which we believe speaks well to the quality of their earnings and their ability to pay future dividends. If you are looking for growth and a raise in pay each year, then Jack Henry & Associate may just be the ticket. We feel they represent good value at today’s price and would add to positions if short-term price volatility provided the opportunity.
Disclosure: Long: JKHY at time of writing.