BROADRIDGE FINANCIAL SOLUTIONS INC. $22 (New York symbol BR; Aggressive Growth Portfolio, Finance sector; Shares outstanding: 125.0 million; Market cap: $2.8 billion; Price-to-sales ratio: 1.4; Dividend yield: 2.7%; TSINetwork Rating: Average; www.broadridge.com) provides communication, processing and other services to the investment industry. These services help its customers cut costs and focus on their core businesses.
Broadridge’s clients include 250 banks, 500 mutual-fund families and over 5,000 publicly traded companies.
The company gets roughly 75% of its revenue from its Investor Communication Solutions division, which distributes proxy materials, including ballots, to investors in stocks and mutual funds. It then counts the votes. Broadridge’s ProxyEdge software helps centralize and simplify shareholder voting, particularly if a meeting involves multiple ballots. Broadridge mails and processes two-thirds of all proxy votes in the U.S.
The remaining 25% of the company’s revenue comes from its Securities Processing Solutions division. This division provides transaction-processing services that automate many routine functions, including taking and executing orders, confirming trades, settlement and accounting.
If you assume that Broadridge became a separate company in 2006, its revenue rose 15.0%, from $1.9 billion in 2006 to $2.1 billion in 2008 (fiscal years end June 30). Revenue fell 2.7%, to $2.07 billion, in 2009, but rose 6.6%, to $2.2 billion, in 2010.
Earnings rose 3.6%, from $1.39 a share (or a total of $193.3 million) in 2006 to $1.44 a share (or $200.3 million) in 2007. Earnings fell 6.9%, to $1.34 a share (or $188.4 million), in 2008. However, earnings rose 19.5%, to $225.1 million, in 2010. Earnings per share rose at a faster pace of 20.9%, to $1.62, due to fewer shares outstanding.
Sale cuts risk, adds revenue
The company is now closing its Clearing and Outsourcing Solutions division, which provides securities clearing, custody and record-keeping services to brokerage firms.
It recently sold this business’s contracts to Penson Worldwide Inc. As part of the deal, Broadridge agreed to provide Penson with certain securities-processing and other back-office functions for the next 11 years.
The deal should add $55 million a year to Broadridge’s revenue. It also means that Broadridge no longer has to hold capital to back up trades. This will free up $240 million that it can use elsewhere.
It may use these funds to buy other companies. Broadridge recently agreed to buy Matrix Financial Solutions Inc. of Denver, Colorado, for $201 million. Matrix, which processes trades and provides administrative services to mutual-fund companies, will add $80 million to Broadridge’s annual revenue. It should also increase Broadridge’s annual earnings by $0.09 a share by fiscal 2012.
Broadridge is also paying $19.5 million for Forefield Inc. of Marlborough, Massachusetts. Forefield’s products include web-based software that allows financial advisers to deliver educational and marketing materials to clients.
Big savings from new IBM deal
Savings from a new alliance with International Business Machines Corp. (New York symbol IBM) will also help Broadridge pay for these purchases.
Under the terms of this 10-year deal, IBM will manage all of Broadridge’s computer networks. IBM’s expertise will help Broadridge make its transaction-processing services more efficient. The company expects this contract will save it $25 million a year, starting in fiscal 2013.
The IBM deal will also help Broadridge develop new services. For example, its Virtual Shareholder Meeting service lets companies hold their annual meetings online. That lets more investors participate and vote. Twenty of Broadridge’s clients held virtual meetings in fiscal 2010, often at the same time as their regular annual meetings.
The stock fell to $9.72 during the financial crisis in November 2008, but rebounded to $24 in May 2010. It now trades at 13.9 times the $1.58 a share that Broadridge will probably earn in fiscal 2011. Broadridge has also raised its dividend by 150.0% since it became a public company. The current annual rate of $0.60 yields 2.7%.
Set to gain from long-term trends
Broadridge’s services give it recurring revenues, typically under long-term contracts. Each new account brings a stream of stable or growing revenue. As well, its systems help both large and small clients cut their costs, while it profits from a continuing drop in computing costs.
Moreover, the company stands to gain from increasingly complex securities regulations and rising levels of share ownership.
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