Broadridge Financial Solutions: Great Total Return, Long Term Buy

Summary

• Broadridge Financial Solutions' total return outperformed the Dow average for my 49.0 month test period by 82.80%, which is great.
• Broadridge Financial Solutions S&P CFRA, three-year forward CAGR of 12%, is good and will give you good growth with the increasing economy and population.
• Broadridge Financial Solutions dividends are slightly below average at 1.9% and have been increased for 11 years in a row.

This article is about Broadridge Financial Solutions (NYSE:BR) and why it's a buy for the total return investor that also wants some solid, increasing dividend income. Broadridge Financial Solutions is a provider of investor communications and technology-driven solutions to banks, broker-dealers, mutual funds, and corporate issuers. BR is an investment for the growth investor who also wants a reasonable income in the information technology sector.

Broadridge Financial Solutions will be reviewed using the Good Business Portfolio Guidelines. The company has steady growth and has cash it uses to increase the dividends each year and grow the company. Right now with the market relatively high, BR is beating the market. The recent dip at the end of 2018 has created a buying opportunity at a great price.

When I scanned the five-year chart, Broadridge Financial Solutions has a great chart going up and to the right in a steady, strong slope for the last five years with hardly a bump down until the end of the year 2018 when the market had a downturn.

Data by YCharts

Fundamentals of Broadridge Financial Solutions will be reviewed on the following topics below.

• The Good Business Portfolio Guidelines
• Total Return and Yearly Dividend
• Last Quarter's Earnings
• Company Business
• Takeaways
• Recent Portfolio Changes

I use a set of guidelines that I codified over the last few years to review the companies in The Good Business Portfolio (my portfolio) and other companies that I am reviewing. For a complete set of the guidelines, please see my article " The Good Business Portfolio: Update to Guidelines, August 2018". These guidelines provide me with a balanced portfolio of income, defensive, total return and growing companies that hopefully keeps me ahead of the Dow average.

Good Business Portfolio Guidelines

Broadridge Financial Solutions passes 11 of 11 Good Business Portfolio Guidelines, a good score (a good score is 10 or 11). These guidelines are only used to filter companies to be considered in the portfolio. Some of the points brought out by the guidelines are shown below.

1. Broadridge Financial Solutions does meet my dividend guideline of having dividends increase for 8 of the last ten years and having a minimum of 1% yield, with 11 years of increasing dividends and a 1.9% yield. Broadridge Financial Solutions is, therefore, a good choice for the dividend income investor. The five-year average payout ratio is moderate at 42%. After paying the dividend, this leaves cash remaining for increasing the business of the company.
2. I have a capitalization guideline where the capitalization must be greater than $10 Billion. BR passes this guideline. BR is a mid-cap company with a capitalization of $11.9 Billion. Broadridge Financial Solutions 2019 projected cash flow at $650 Million is good allowing the company to have the means for company growth and increasing dividends each year.
3. I also require the CAGR going forward to be able to cover my yearly expenses and my RMD with a CAGR of 7%. My dividends provide 3.3% of the portfolio as income, and I need 1.9% more for a yearly distribution of 5.2% plus an inflation cushion of 1.8%. The three-year forward S&P CFRA CAGR of 12% easily exceeds my guideline requirement. This good future growth for Broadridge Financial Solutions can continue its uptrend benefiting from the continued strong growth in the economy.
4. My total return guideline is that total return must be greater than the Dow's total return over my test period. BR passes this guideline since their total return is 122.22%, more than the Dow's total return of 39.41%. Looking back five years, $10,000 invested five years ago would now be worth over $30,600 today. This makes Broadridge Financial Solutions a great investment for the total return investor looking back, that has future growth as the United States economy continues to grow. As an added plus we have President Trump cutting corporate taxes which have increased earnings of BR, since the company was paying a 33% tax rate last year and now pays 14% as stated in the earnings call .
5. One of my guidelines is that the S&P rating must be three stars or better. BR's S&P CFRA rating is three stars or hold with a target price to $130, passing the guideline. BR's price is presently 30% below the target price and has a moderate forward PE of 21, making BR a buy at this entry point. If you are a long-term investor that wants good steady increasing dividend income and future total return growth you may want to look at this company.
6. One of my guidelines is would I buy the whole company if I could. The answer is yes. The total return is strong, and the average growing dividend makes BR a good business to own for income and growth. The Good Business Portfolio likes to embrace all kinds of investment styles but concentrates on buying businesses that can be understood, makes a fair profit, invests profits back into the business and also generates a good income stream. Most of all what makes BR interesting is the potential long-term growth of their business as the investment sector and economy increases. BR gives you an increasing dividend for the dividend investor and great total return.

Total Return and Yearly Dividend

The Good Business Portfolio Guidelines are just a screen to start with and not absolute rules. When I look at a company, the total return is a key parameter to see if it fits the objective of the Good Business Portfolio. Broadridge Financial Solutions beats against the Dow baseline in my 49.0-month test compared to the Dow average. I chose the 49.0 month test period (starting January 1, 2015, and ending to date) because it includes the great year of 2017, and other years that had fair and bad performance. The great total return of 122.22% makes Broadridge Financial Solutions a great investment for the total return investor that also wants a steadily increasing income. BR has a slightly below average dividend yield of 1.9% and has had increases for 11 years, making BR also a good choice for the dividend growth investor. The dividend was last increased in August 2018 to $0.485/Qtr. up from $0.365/Qtr. or a 33% increase with increases expected to continue for years.

DOW's 49.0 Month total return baseline is 39.41%

Company name 48 Month total return The difference from DOW baseline Quarterly dividend percentage Automatic Data Processing 122.01% 82.80% 1.9% Click to enlarge

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Last Quarter's Earnings

For the last quarter on November 6, 2018, Broadridge Financial Solutions reported earnings that beat expected by $0.10 at $0.79, compared to last year at $0.54. Total revenue was higher at $973 Million more than a year ago by 5.2% year over year and beat expected by $2.86 Million. This was a great report with bottom line beating expected and the top line increasing with a good increase compared to last year. The next earnings report will be out February 2019 and is expected to be $0.73 compared to last year at $0.52 a good increase.

The graphic below shows the significant parameters of the earnings.

Source: BR 1st quarter Earnings call slides

Business Overview

Broadridge Financial Solutions is one of the largest financially oriented information technology companies in the United States. Broadridge Financial Solutions services provides major functions to the investment sector. The Company's segments major segments are listed below.

As per excepts from Reuters

• Investor Communication Solutions business involves the processing and distribution of proxy materials to investors in equity securities and mutual funds, as well as the facilitation of related vote processing.
• Customer communications services include the processing and distribution of account statements and trade confirmations, traditional and personalized document fulfillment and content management services, marketing communications, and imaging, archival and workflow that enable its clients' communications with investors and customers.
• Advisor services integrates data, content and technology to drive new client acquisition and cross-sell opportunities through the creation of sales and educational content, including seminars and a library of financial planning topics, as well as customizable advisor Global
• Technology and Operations offers a suite of computerized real-time transaction processing services that automate the securities transaction lifecycle, from desktop productivity tools, data aggregation, performance reporting, and portfolio management to order capture and execution, trade confirmation, settlement, reference data, reconciliations and accounting.
• Investment Management Solutions provides front-, middle- and back-office solutions, such as order management, data warehousing, reporting, reference data management, risk management and portfolio accounting to hedge funds, investment managers and the providers that service this space.

Overall Broadridge Financial Solutions is a good business with 12% CAGR projected growth, as the United States economy grows, going forward, with the increasing demand for Broadridge's products and services. The slightly below average dividend income brings you cash as we continue to see further growth as the economy grows.

The FED has kept interest rates low for some years, and on December 19, 2018, they raised the base rate 0.25%, which was expected. I believe that they will go slow in 2019, which should help keep the economy on a growth path. If infrastructure spending can be increased, this will even increase the United States growth going forward with better economics for the consumer. The FED lowered GDP projection for 2019 which may mean they are getting to neutral on the economy, projecting two rate increases for 2019. The recent volatility may keep the FED on hold. At the FED meeting in January, the statement was a wait and see and a bit more dovish than the last meeting.

Excerpts from November 6, 2018, earnings call Richard J. Daly (Chief Executive Officer)

Broadridge is off to a good start to the fiscal year 2019. We reported solid first quarter results and announced an important deal to build a next-gen wealth platform with UBS. We have four items on our agenda this morning. First, I'll begin with some quick highlights of our first quarter 2019 results, and I will close with some parting words, including some thoughts on why I think the best is yet to come for Broadridge.

There are lots to talk about, so let's get started. Broadridge reported solid first quarter results. Total revenues rose 5% to $973 million, propelled by recurring revenue growth of 5% and a 30% increase in event-driven revenues. Adjusted operating income rose 15%, and margins grew by 110 basis points. Adjusted EPS, aided by a lower tax rate and a higher excess tax benefit from equity compensation, rose 46% to $0.79.

We continue to see strong momentum in the marketplace. The sale to UBS that we announced last month to build a next-gen front-to-back wealth management technology platform is a significant step. At our Investor Day last year, the team highlighted the opportunity we saw in the wealth management market, and this agreement is an important proof point that wealth management can be a strong franchise business for Broadridge alongside governance and capital markets. In addition, the size and scope of this deal are more indications that Broadridge is increasingly recognized as a transformation agent by the largest financial services firms in the world.

I strongly believe, both as an associate and a shareholder that the best is yet to come for Broadridge. The truth is that I'm more excited about the future of our company today than when I sat down in my extra bedroom 30-odd years ago to write the first business plan for our communications business. The opportunities for what Broadridge does today are bigger than ever."

This shows the feelings of top management for the continued growth of the Broadridge Financial Solutions business and shareholder return with an increase in future growth. BR has good constant growth and will continue as the economy grows.

The graphic below shows the 2019 outlook that will continue to bring growth to the stockholders.

Source: BR 1st quarter Earnings call slides

Takeaways

Broadridge Financial Solutions is a good investment choice for the total return investor with it's slightly below average dividend yield and high total return. Broadridge Financial Solutions will be considered for The Good Business Portfolio to add to its total return growth companies when cash is available. If you want a solid growing dividend income and great total return in the information processing business BR may be the right investment for you.

Recent Portfolio Changes

I intend to watch the earnings reports for the companies in the portfolio and may finally decide to trim my high flyers that are over 8% of the portfolio so I can invest in good companies on my buy list.

• On January 30 increased the position of Simulations Plus (SLP) from 0.2% of the portfolio to 0.4%. I want a little more income.
• On January 28 Bought a starter position of Realty Income Corp. (O), I could use a bit more steady income and hope to add to this holding in the future. Realty Income Corp. is now 0.4% of the portfolio.
• On January 28 sold the remaining portion of Mondelez (MDLZ). The forward growth does not look good enough.
• On January 24 increased the position of Digital Reality Investors (DLR) from 3.1% of the portfolio to 3.6%. I want to get DLR up to a full position of 4%.
• On January 16 sold the remaining shares of 3M (MMM). I decided to sell this small position in order to reduce the number of positions with a new target number of 20 positions max from 25.
• On January 11 started a new position in Lockheed (LMT) at 0.65% of the portfolio.
• On January 9 trimmed Mondelez from 1.32% of the portfolio to 0.64%. The growth rate looks low going forward, and the portfolio is looking at Lockheed as a replacement.
• On November 19 the portfolio trimmed 3M from 1.4% of the portfolio to 0.92%. The last earnings report was fair but and the next year does show the growth that is wanted. I was going to sell this small position, but the recent market volatility makes me want to hold this defensive income position.
• On October 10 trimmed Home Depot (HD) from 10.1% of the portfolio to 9.6%. I love HD but don’t want it to get above 10% of the portfolio.
• On October 10 the portfolio added starter position of VISA (V) at 0.4% of the portfolio.
• On August 22 increased the percentage of DLR to 3.3% of the portfolio, I want to get this REIT to a full position of 4%.

The Good Business Portfolio trims a position when it gets above 8% of the portfolio. The four top companies in the portfolio are, Johnson & Johnson is 8.1% of the portfolio, Omega Health Investors (OHI) is 8.7% of the portfolio, Home Depot (HD) is 8.9% of the portfolio and Boeing is 14.8% of the portfolio. Therefore BA, OHI, JNJ, and Home Depot are now in trim position, but I am letting them run a bit since they are great companies.

Boeing is going to be pressed to 14% of the portfolio because of it being cash positive on 787 deferred plane costs at $316 Million in the first quarter of 2017, an increase from the fourth quarter. The first quarter earnings for 2018 were unbelievable at $3.64 compared too expected at $2.64. Farnborough Air Show sales in dollar value just beat out Air-Bus by about $6 Billion, and both companies had a great number of orders. Boeing received an order for 18 more KC-46A planes. The second quarter 2018 earnings beat expectations by $0.06 at $3.33, but a good report was hurt by a write off expense on the KC-46 which has started delivery in 2019. Two KC-46A tankers were delivered in January 2019. As a result of the good fourth-quarter earnings, S&P CFRA raised the one-year price target to $500 for a possible 32% upside potential.

JNJ will be pressed to 9% of the portfolio because it's so defensive in this post-BREXIT world. Earnings in the last quarter beat on the top and bottom line and Mr. Market did nothing. JNJ has an estimated dividend increase to $0.97/Qtr. in April 2019, which will be 57 years in a row of increases. JNJ is not a trading stock but a hold forever; it is now a strong buy as the healthcare sector remains under pressure.

For the total Good Business Portfolio, please see my article on The Good Business Portfolio: 2018 3rd Quarter Earnings and Performance Review for the complete portfolio list and performance. Become a real-time follower, and you will get each quarter's performance after this earnings season is over.

I have written individual articles on JNJ, EOS, GE, IR, MO, BA, TXN, ADP, PM, Omega Health Investors, Digital Investors Trust (DLR) and Automatic Data Processing that are in The Good Business Portfolio and other companies being evaluated by the portfolio. If you have an interest, please look for them on my list of previous articles.

Of course, this is not a recommendation to buy or sell, and you should always do your own research and talk to your financial advisor before any purchase or sale. This is how I manage my IRA retirement account, and the opinions of the companies are my own.

Analyst’s Disclosure: I am/we are long BA, JNJ, HD, OHI, MO, IR, DLR, GE, PM, PEP, TXN, ADP, AMT, O, SLP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.