FactSet Research Systems (FDS) is a rapidly growing dividend star. The money management industry is intensely fierce as each competitor wants an edge on other hedge funds and buy side shops. I own FactSet stock due to the high quality of research provided to clients. FactSet sells financial data to hedge funds, buy side entities, high net worth clients and endowments. The data is considered vital to the success of well to do investment entities. Research is the key to the success or failure of hedge funds. In this article I'll focus upon FactSet's current 1.1% dividend yield and why the yield on cost should increase for years to come.
FactSet Research Systems' 15 Year Dividend and Stock Performance
FactSet Research Systems was established in 1978 to provide financial research and data to Wall Street, when reports were delivered by hand and computers and networks were not mainstream. Over the past 33 years since its founding, FactSet has grown its product and service offerings significantly, kept pace with technological innovation, gone public with shares listed on the NYSE and NASDAQ, expanded overseas, won multiple awards and grown annual revenue to over $726 million in 2011.
FactSet earns its revenue from customer subscriptions for its data and tools. In 2011, FactSet received 68.5% of its revenue from the U.S., 24.6% from Europe and 6.9% from Asia and in all from 24 worldwide offices. Over the years, FactSet has seen its annual subscription value (ASV) increase from $235 million in 2003 to $803 million in 2012 at a compounded annual growth rate of 13%. That said, global economic weakness, a prolonged bear market, consolidation or failures in the investment banking sector and its own ability to keep pace with technological innovation and competition could impact FactSet's business and revenues.
Type of Information
Today, FactSet provides real time and near real time financial information and analytical tools to global investment managers, investment bankers, professional investors, financial media, corporations, academia and economics, accounting and finance related entities across the world. FactSet is used for equity analysis, quantitative models, risk analysis, portfolio analysis, fixed income analysis, charting and presentations, deal analytics, idea screening, people intelligence, accountability and corporate governance.
FactSet's information includes economic and financial data on countries, industries and tens of thousands of companies across the globe with information such as financials (income statement, balance sheet, cash flow), news summaries, earnings releases, transcripts of investor presentations, deal data (mergers, acquisitions, spinoffs), shareholder data (shares outstanding, ownership, insider transactions, block purchases, analysts' earnings estimates), industry and competition data, comparable fundamentals (valuation and performance ratios, comparable deals, debt-to-equity benchmarks) and almost every other piece of relevant data.
FactSet serves up its mother lode of data using its proprietary technology based platform which allows users to either log in and access data or have data sent to them in real-time. FactSet makes data easier to use with a host of analytical tools such as Single Name Security Exposures so a portfolio manager can gauge exposure to a single stock or security across all portfolios, Ownership 2.0 for data on stock ownership, FUEL Sidebar for real time data integration into Excel models, Company Reports that translates company reports into web ready HTML formats for quick publishing, Country Synopsis for country specific financial data, Microsoft Office Integration and a few others.
FactSet attempts to differentiate its services by focusing on technology innovation such as supporting wireless devices, adding new features and tools, attention to detail and data accuracy, expanding its reach into promising new global economies and 24/7 customer support. On the financial front, FactSet strives to manage its balance sheet well and carries no debt.
FactSet's main competitors include international financial data providers such as Bloomberg, BondEdge, CapitalIQ, Dealogic, Polypaths, Thompson Reuters, Wilshire Associates and the Yield Book.
FactSet's financial year starts on September 1. On March 13, 2012, FactSet announced results for its second quarter ended February 29, 2012. It reported quarterly revenues of $199.4 million, an increase of 12.2% relative to 2011's $177.6 million. Operating income rose 15.5% year-over-year to $67.1 million and net income was up 3.3% to $46.7 million. Diluted earnings per share grew 7.4% to $1.02. Revenue growth came from 53 net new clients and 400 net new users for a total user base of 47,300 across 2,324 clients. Client retention is an important forward indicator for revenue and earnings consistency and at quarter end, FactSet's client retention stood at 92%, better than the 90% retention last year.
Second quarter earnings handily beat Wall Street revenue and earnings per share estimates. In addition, the company issued third quarter guidance that was also above analyst estimates.
Analyst 10 Year Earnings and Dividend Growth Projections
The company generated $39.1 million in cash from operations in the quarter. At quarter end, its cash balance was $185 million, investments stood at $15.2 million and total assets were $663.8 million. FactSet carried no debt, had $119.8 million in total liabilities and $544 million in stockholders' equity.
The company's ASV rose to $803 million with 81% of its subscription revenue from buy side clients primarily engaged in asset management and 19% from sell side clients (e.g., investment banks). US subscribers contributed 68.2% to ASV and the rest was international, primarily Europe and Asia.
For the quarter, FactSet earned $1.02 per share (GAAP diluted earnings) of which it paid 27 cents as dividends per share. FactSet has a 27% payout ratio which allows it to retain earnings for research and development, marketing, customer retention and market expansion into new geographies, and as such strikes a balance between satisfying shareholders with cash distributions while also focusing on growth initiatives which get parlayed into higher dividend distributions.
Management continues to increase the dividend on an annual basis. The yield on cost will increase as the stock should continue to grow, and annual dividends should continue to grow.
In the quarter, the company added shareholder value by buying back 507,800 shares for $45.1 million, leaving 44.8 million shares outstanding.
As of April 6th, 2012, shares were trading at about $99.52 with a price to earnings ratio of 26.2x and a market capitalization of $4.45 billion (a fairly rich 8.2x book value). Shares have risen sharply since February 2009 and recently traded between $78.25 and an all time high of $112.40 over the past 52 weeks. Quarterly earnings' out performance also led to a10% increase in share price around mid March.
Its low dividend yield of 1.1% is partly a reflection of the steep rise in shares over the past year.
Over the years, FactSet has steadily increased dividends with only a few minor hiccups. Quarterly dividends per share have risen from 3 cents in 2000 to 23 cents in 2010 and up 17.3% to 27 cents over the past four quarters for an annual dividend of $1.08 per share.
FactSet has a steady subscription based revenue model and has successfully grown revenue over the years. It has also exercised solid financial discipline with zero debt and a consistent history of dividend payments. This discipline has paid off handsomely for investors who have received consistent dividends and seen shares rise four fold from about $25 in January 2002 to almost $100 in April 2012.
From a news and company publicity perspective, FactSet maintains a low profile and typically only announces dividend and earnings regularly but abstains from other public relations' noise. In summary, FactSet has conducted its financial affairs and shareholder obligations rather well and shareholders in turn have rewarded the company with steady stock growth.
Accurate and actionable research is the cornerstone to any investment. FactSet has various competitors. The overall financial competition is focused more at the sell side shops and less at the buy side shops. Here are four publicly retail, sell side, and buy side competitors:
1. McGraw Hill Companies, Inc. (MHP)
McGraw Hill has four key segments: Standard & Poors (S&P) Ratings, S&P Capital IQ/S&P Indices, Commodities & Commercial, and McGraw Hill Education. The company offers financial, commodities, independent benchmark data, and analytical tools to its customer base.
2. Morningstar Inc. (MORN)
Morningstar offers independent investment research to investors on a global basis. The company has two core segments: Investment Information and Investment Management. The Investment Information segment is targeted towards sell side, retail, financial advisors and individual clients. Investment Management offers subscription products, management analytical tools, and the Advisor Workstation.
3. Thomson Reuters Corporation (TRI)
Thomson Reuters offers investors to connect, access content, and trade in a secure environment through Thomson Reuters Eikon desktop, Thomson Reuters Elektron network. Thomson Reuters Elektron is a trading and data infrastructure that offers global market access with modern trading programs. Clientele can trade in foreign exchange markets, fixed income and derivatives markets, and equities.
4. MSCI Inc. (MSCI)
MSCI offers products to address risk management, performance, and corporate governance products on a global scale. Tools include investment decision support tools, performance analytics, and credit analytics. The company has approximately 5,800 customers worldwide.
I believe dividend growth investors should buy FactSet stock. The company has a captive audience. The products sell themselves due to their proprietary nature. The clientele need the proprietary information. The dividend is likely to grow as earnings expand. 81% of clients are buy side. This is a key audience as the clients want quality products and are willing to pay for the best qualitative and quantitative information.
Disclosure: I am long FDS.