Broadridge Could Be A Wall Street Disruptor

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About: Broadridge Financial Solutions, Inc. (BR), Includes: UBS
by: Zvi Bar
Summary

Broadridge is attempting to grow by adding a wealth management platform business to it core proxy business.

Broadridge's core business is still a nice and consistent money maker.

Broadridge has increased its dividend for over a decade and will likely be an aristocrat in another two decades.

Broadridge appears to be priced almost exclusively on their existing business, and should increase significantly if their wealth management platform proves successful.

Broadridge Financial Solutions (BR) is a financial services firm that is best known for proxy services, where it is the dominant provider. The company's core business has proven to be reasonably resilient and consistent, and it is now attempting an ambitious expansion into operations services for investment management companies. If successful, Broadridge could undergo considerable growth, and a diversified business that could be more profitable than their continuing core business.

A budding new business that could get large

Last year, Broadridge launched its wealth management platform, with UBS (UBS) as its anchor client. Broadridge described its wealth platform as "a next-generation open platform that will solve a key financial services challenge by creating a modern, industry-level wealth management best-in-class technology solution."

The platform is designed to mutualize investments in technology, innovation and security. Another way of stating that is that the tremendous burden of keeping up with regulations has become so expensive that Broadridge seeks to develop a solution where wealth managers can share costs. I believe that they can have some serious success with a platform that effectively cuts costs.

If UBS is happy with the services and other wealth managers follow them onto the platform, Broadridge and existing wealth managers on the platform should benefit from sharing costs.

UBS was a great first client to get. It is a massive wealth manager. Further, Broadridge continues to make acquisitions to enhance the platform's capabilities. Broadridge just recently reported it acquired Rockall, a securities-based lending and collateral management technologies company, for an undisclosed amount.

Rockall presently manages over $3 trillion of collateral, and does business with major banks that include Wells Fargo (WFC), US Bank (USB) and Barclays (BCS), among others.

In Broadridge's press release, Michael Alexander, head of Broadridge's North American Wealth and Capital Markets Group, commented:

The acquisition of Rockall is the most recent example of Broadridge growing our wealth franchise by expanding our core wealth offering for clients. Securities-based lending and collateral management are key industry areas in need of innovation, and we look forward to leveraging next-generation technology to provide proven solutions to clients while mutualizing key front-, middle- and back-office functions.

Securities-based lending is a growing business that has become more of an essential offering for wealth management firms. As a growing number of investors are come to value securities-based lines of credit, financial services firms will need to automate and scale their operations in a manner that makes sense for this platform.

Further, since many wealth management firms are already customers of Rockall's securities-based lending services, it is possible that some of them are now more likely to utilize Broadridge's platform.

Valuations are reasonable

Broadridge valuations may have become frothy last year, in anticipation of this new business line, but they have since returned to more reasonable levels. Though Broadridge does have a high P/E, that is because their business produces strong cash flow and is asset light. Broadridge actually traded at far richer valuations for most of the past two years.

(Source: SeekingAlpha)

At the same time, leveraged free cash flow is at all-time highs:

(Source: SeekingAlpha)

As is the companies EBIDTA:

(Source: SeekingAlpha)

This performance indicates Broadridge may continue to maintain existing multiples and possibly deserve a higher valuation upon the meaningful participation of their new platform.

Broadridge risks

Broadridge is not a household name and it tends to move with financials, so it is susceptible to broad sector moves. Moreover, because it is in the process of building a new platform, and it is acquiring businesses to enrich that platform, the company has the potential to decline on increased spending and costs related to integrating these businesses.

Broadridge could end up spending a considerable amount on this wealth management platform and it could end up failing. It is also possible the company will lower future revenue expectations from the platform, or its profitability. Broadridge also could find integrating acquired components to be more difficult or costly than anticipated.

Broadridge's core business is very secure, which gives the company the ability to take chances on growing a new business line. At the same time, it is possible a competitor can emerge to any of their business lines, including proxy voting services. Even an unsuccessful entrant could have significant effects upon margins.

Broadridge is a dividend darling

Broadridge is not a dividend aristocrat, but it will probably end up one. It was it was spun off of ADP, which is an aristocrat, and it has increased its dividend every year since.

Broadridge's dividend is not enormous, but it is growing and is fueled by the company's EPS growth. Broadridge was already able to consistently increase its dividend on the strength of its core business, and now it has the potential to supplement that growth from an entirely new business.

broadridge dividend growth (Source: SeekingAlpha)

Broadridge appears committed to returning capital to shareholders. The company has been a consistent repurchaser of shares too.

Conclusion

Broadridge is a high quality business that has a history of growing and returning capital to shareholders. The company is attempting to enter a new business line with a wealth management platform that has tremendous potential. It is still unclear how successful the platform may be, if at all. As a result, shares have the potential to increase significantly upon news of continued platform adoption.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.