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CDW Corp.: Firming Profitability Supports Dividend Growth In 2020

About: CDW Corporation (CDW)
by: BOOX Research
BOOX Research
Contrarian, long/short equity

CDW Corp. reported its Q4 earnings, which beat expectations highlighted by continued strong growth and firming profitability.

The company has increased its quarterly dividend rate in each of the past 6 years and is committed to annual dividend growth going forward.

2019 acquisitions represent new growth opportunities as the company expands into IT consulting and network advisory services.

Management 2020 EPS and revenue growth guidance are positive, but represent a deceleration compared to stronger trends in recent years.

CDW Corp. (NYSE:CDW), with a market cap of $19.5 billion, is a major electronics reseller and IT solutions provider focusing on corporate customers along with government agencies, education sector, and healthcare organizations. An extensive product catalog is meant as a one-stop shop for all workplace networking and computing technology. The stock has been a market juggernaut, returning an impressive 690% since its 2013 IPO supported by steady growth and accelerating earnings. CDW Corp. just reported its latest quarterly results, which beat expectations, setting up positive guidance for the year ahead. We think this is a high-quality company and also interesting as a dividend grower.

(Source: Finviz)

CDW Corp. Q4 Earnings Recap

CDW Corp. reported its fiscal 2019 Q4 earnings on February 6th with non-GAAP EPS of $1.57, which was $0.09 ahead of estimates. Revenue of $4.54 billion increased by 11.3% year over year and also beat expectations. For the full year, EPS of $6.10 was up 18%, compared to $5.17 in 2018. This was an overall solid report that "reinforces the power of the business model and strategy", as per the press release.

(Source: Company IR)

Financial and operating metrics continue to present strong growth with average daily sales of $72 million, up from $64.7 million in Q4 2018. The gross margin for the full year 2019 reached 16.9%, up 20 basis points from 16.7% in 2018. The operating margin similarly improved based on moderate expense and cost growth. Notably, SG&A as a percentage of revenue was 10.9% in Q4, declining from 11.1% in Q4 2018.

The company highlights a balanced portfolio of customers, with the corporate business segment representing about 42% of total sales in 2019. The corporate segment sales grew 7% y/y in Q4, while a 20.7% growth from the government segment and 13.6% growth in healthcare customers were the strong points. Notably, the segment classified as "Other", which is the business outside of the U.S. including Canada and the U.K., has been the growth driver, up 27.2% y/y in Q4.

(Source: Company IR)

2020 Guidance

Management offered full-year 2020 guidance targeting net sales growth based on the U.S. IT market growth plus 200-300 basis points in constant currency. IT market growth representing the spending rate of customers is estimated to be 2.5-3%, implying net sales growth guidance around 5%. Non-GAAP operating margin in the mid-7%'s is about flat, compared to 7.5% in 2019. Management expects EPS to increase by ~10%.

(Source: Company IR)

In terms of current consensus estimates for earnings and revenue growth, the market expects CDW EPS in 2020 to reach $6.71, representing an 11.4% y/y increase. Full-year revenue estimate at $19.1 billion implies a 6% increase compared to the 2019 result. Looking ahead, EPS growth is expected to remain near 10% for fiscal 2021. Notably, these growth estimates represent a deceleration compared to stronger trends in recent years, but still positive.

(Source: Seeking Alpha Premium)

CDW Dividend Growth

The company has increased its dividend each year since the 2013 IPO. The last rate hike came in October 2019, with CDW announcing a new quarterly rate of $0.38, up 28.8% compared to the prior $0.30 per share level. The forward dividend yield based on the current rate is 1.1%.

ChartData by YCharts

Indeed, CDW has proven to be shareholder-friendly, with dividend growth at a composite annual rate of 40% since 2014. The total amount paid in 2019 of $183 million represents a payout ratio of 26% on net income of $736.8 million. We view the payout ratio as well-supported, combined with an outlook for continued earnings growth representing upside in the dividend going forward.

With the company targeting a payout ratio of around 25%, we think a dividend increase in line with earnings growth of 10% can be expected in 2020. We forecast CDW will increase its quarterly dividend rate to $0.42 per share later this year in October when it declares the Q4 distribution.

(Source: Company IR)

Separately, CDW has also been active with share repurchases. In 2019, the company bought back $657 million worth of stock, implying a buyback yield of approximately 3.3% last year on the current market value. The company's "2020 Capital Allocation Priorities" (see below) includes a commitment to increase the dividend annually and return excess free cash flow after the dividend and potential M&A for more buybacks.

(Source: Company IR)

Analysis and Forward-Looking Commentary

The bullish case for CDW is that it will continue to benefit from several structural growth tailwinds. The company notes that its current addressable market is approximately $360 billion, or nearly 20x 2019 sales of $18 billion, representing room to expand along with international opportunities. Another positive trend is the increasing reliance of industry hardware manufacturers and software developers on resellers like CDW for distribution. Currently, among CDW "partners", 60% of their sales are through indirect channels, which have gained importance in recent years.

(Source: Company IR)

Keep in mind that the partners CDW is referring to include all the major tech players across product segments. By this measure, the company is riding the wave of the market transition towards cloud computing, secured networking, storage, and broader digitalization. CDW's distribution capabilities and sales teams can direct customers to the right solutions as a "mission-critical vendor".

(Source: Company IR)

CDW has been increasingly active in targeted M&A for strategic growth opportunities. In 2019, the company acquired Scalar Decisions Inc. and Aptris Inc., highlighting a move towards integrated services as a growth opportunity. These businesses expand into network and cloud infrastructure consulting and advisory to design IT systems. Indeed, we think the company's long-term outlook is bright as it leverages the customer and vendor relationships. From the conference call:

Our services business had a tremendous 2019 with high teens growth reflecting our services led go to market approach. Cloud also contributed to this quarter's results, with double-digit increases in customer spend and gross profit. Growth was driven by productivity, security, and collaboration as well as public cloud infrastructure as a service. As you can see, we had excellent, well-balanced performance in the quarter and we were able to help our customers across a broad spectrum of IT needs.

In terms of valuation, considering the consensus 2020 EPS, the company's current forward P/E at 20.5x seems reasonable compared to a 3-year average of 23.5x. As the business grows with the services and advisory segments representing growth drivers, it's expected that margins could climb higher, driving a multiples expansion.

ChartData by YCharts

Balancing our favorable opinion of the company, we rate shares of CDW Corp. as a Hold. Our thinking here is that the current forward P/E multiple around 21x is fair in the context of an expectation of moderating growth rates for the year ahead compared to stronger trends in prior years. We'd like to see the company make more progress in its international expansion and drive financial margins higher with a more focused push into consulting and advisory services.


To the downside, the potential of a cyclical slowdown represents the main risk which is very connected to trends in business spending and IT services. In this regard, the last 10 years with resilient economic growth and the fundamental drivers of higher spending by companies to upgrade technology were positive for CDW. We expect that in the scenario of a slowdown in the U.S. and/or global economy, CDW would face a challenging operational profile.


2019 was a continuation of trends CDW has presented over the past decade of strong growth and accelerating earnings. The company is benefiting from its consolidating market leadership position and the ongoing transition of business towards cloud computing and the greater use of networking technologies. We think CDW is a quality dividend growth stock with overall solid fundamentals.

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.