Despite causing an initial downturn, a major sale should strengthen this Canadian company’s balance sheet and its outlook.
The move is just part of the company’s strategy for adapting to a rapidly changing information industry. Earnings rose in the latest quarter, and cash from the sale will help pay down the company’s debt and sustain its dividend—now yielding 3.2%
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THOMSON REUTERS CORP. (Toronto symbol TRI; www.thomsonreuters.com)sells specialized information products to financial clients such as banks and brokerages. It also sells specialized information to professionals in the legal, and tax and accounting fields. It owns the Reuters news service.
In the past few years, the company has aggressively cut its costs and sold many of its less-important businesses. Those savings free up cash the company can use to improve its products, particularly as more of its clients access its data online.
In January 2018, Thomson announced that it will sell 55% of its Financial & Risk (F&R) division to a group led by Blackstone Group LP (New York symbol BX). This business sells specialized information products to financial clients such as banks and brokerages. It currently supplies about half of the company’s revenue.
In exchange, Thomson will receive $17 billion—$3 billion in cash and $14 billion in notes and preferred shares (all amounts except share price and market cap in U.S. dollars). The company’s Reuters news service will also supply content to F&R. For that, Thomson will receive $235 million a year for the next 30 years. The company expects to complete the transaction by the end of 2018. It has already overcome one regulatory obstacle: the antitrust commission for the European Union approved the deal this week.
If you exclude the F&R division, as well as costs related to the sale, Thomson’s earnings in the first quarter of 2018 rose 9.4%, to $197 million from $180 million a year earlier. Earnings per share gained 12.0%, to $0.28 from $0.25, on fewer shares outstanding. Those gains reflect better earnings from its tax and legal businesses. Revenue rose 3.6%, to $1.38 billion from $1.33 billion.
Blue Chip Stocks: Company planning to buy back up to $10 billion of its shares
Thomson plans to use between $3 billion and $4 billion to pay down its long-term debt, which was $5.3 billion as of March 31, 2018. That’s equal to 15% of its market cap. The company also held cash of $502 million.
Moreover, Thomson intends to buy back up to $500 million of its shares before the F&R sale is completed. After that, it may repurchase up to $10 billion of its shares. Share buybacks raise earnings per share and other per-share calculations. That gives the remaining shareholders a larger stake in the company.
The stock declined by just over 20% after Thomson announced the F&R sale, but has since recovered almost all of those losses. The decline was partly due to fears the sale will prevent the company from increasing its dividend. However, Thomson plans to maintain the current rate.
The company last raised its quarterly dividend in March 2017. Investors now receive $0.345 U.S. a share instead of the previous $0.34 U.S. The current annual rate of $1.38 U.S. yields 3.2%. The company’s dividend has grown an average of 1.5% annually over the last 5 years.
Blackstone’s involvement should help spur F&R’s revenue and earnings. The company expects to earn $2.65 a share in 2018. The stock trades at 21 times that forecast.
Recommendation in The Successful Investor: Thomson Reuters is a buy.
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