Wednesday, February 22, 2017

Thomson Reuters - 24 Years of Dividend Growth

Part of the challenge of working through the Canadian Dividend All-Star list is analyzing companies you have never considered purchasing in industries you know very little about. Such is the case today for Thomson Reuters ("TRI"), a publishing company with a 24-year history of raising its dividend. 

Company Overview

Thomson Reuters is truly a worldwide provider of news and information for professional markets with operations in over 100 countries.  The company reports on three main business segments: Financial & Risk (55% of FY16 revenue), Legal (31% of FY16 revenue) and Tax & Accounting (14% of FY16 revenue). In addition, the company also operates Reuters, which provides real-time multimedia news and information to newspapers, television and cable networks, and Websites. 

Dividends

After announcing a 1.5% dividend increase on February 9th the company's dividend yield is currently ~3.2%. The earnings payout ratio is relatively high at 65% of the trailing 12-months adjusted EPS.  The 3, 5, and 10 year dividend growth rates are unimpressive at 1.5%, 1.9%, and 4.4% respectively.
% annual average growth planned through 2021
Valuation
The current share price of ~$57 has lead to a trailing P/E of 27X. This value is relatively high given the stock has traded in the 20-25X range for most of the past 5 years. Looking at EV/EBITA leads to a similar conclusion, with the company currently trading at 12.5X in contrast with their 5-year average in the 9-12X range.

Catalysts

There are a couple key reasons why you would consider adding Thomson Reuters to your investment portfolio.

1. History of Cashflow Generation in Support of Rising Dividend
- Although TRI is classified in the "consumer cyclical" sector, the company has a proven history of converting their revenue (which is mainly derived from subscription services) into positive cashflow and then using it to support a slowly rising dividend. The company has managed to keep both shareholders and debt holders satisfied with their actions, and benefits from an investment grade BBB+/Stable issuer rating. 
2. Good Industry & Geographical Diversification
- Unlike many Canadian companies, TRI has excellent geographical sales diversification, deriving revenue from over 100 countries worldwide. As indicated above in the "Company Overview", each of their three reportable segments generates material amounts of sales. 

** Although I have listed three "Catalysts" in each of my four past reviews of Canadian dividend growers, I do not feel there is a strong enough third catalyst to include for Thomson Reuters. This will likely become more apparent when reviewing the three drawbacks. 

Drawbacks

Although there some good reasons to consider investing in Thomson Reuters, there are major drawbacks to consider as well. 

1. Slowing Dividend Growth
- Although TRI’s management does not specifically issue guidance regarding dividend growth, since 2012 management has increased their dividend by two cents per share each year, meaning the dividend growth percentages will decrease if the two cent trend continues. With the latest dividend raise being only 1.5%, Thomson's dividend growth is starting to lag inflation. 
2. Revenue Decline with No Specific Growth Catalysts Identified
Since achieving total revenue of $13.8B in 2011, TRI's revenue has progressively dropped each year to $11.2B in 2016. Although management forecasts "low single-digit revenue growth" in 2017, they did not clearly identify specific strategies to reach this guidance. Profitability has been maintained through expense control in recent years, but will continue to be challenged without topline growth. 
3. High Valuation
Although I can understand an investor wanting to add TRI to their portfolio in order to improve sector and geographical diversification, based on historical valuations, the company seems quite expensive at the current time. Buying the stock at this historically high valuation will likely lead to investors realizing minimal returns on the shares going forward. 
  
Conclusions

Even though I can see why an investor might keep shares of Thomson Reuters that they purchased at a better valuation in their portfolio, I do not see any reason why one would consider adding it as a new position at its current price level. There are enough red flags (slowing dividend growth, revenue decline, and high valuation) that I would caution buying shares of Thomson Reuters until growth catalysts become more apparent. 


Would you consider adding shares of  Thomson Reuters to your portfolio?

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