They say life is short.
In cosmic scale, a human lifetime is nothing more than a blink of an eye.
At a more human level, however, 80 or so years is a good chunk of time that can allow one to get a lot done.
And I can think of nothing worth “getting done” more than achieving financial freedom.
That short, valuable time we get very little of is supercharged when we can put ourselves in a position to own that time.
Financial freedom is all about maximizing the very small allotment of time we’re given.
If we’re only given so much time, we may as well make the most of what we’ve got.
Toward this end, I’m an ardent fan, and personal practitioner, of the dividend growth investing strategy.
This long-term investment strategy endorses buying and holding shares in world-class businesses paying safe, growing dividends.
You can find many examples of what I mean by pulling up the Dividend Champions, Contenders, and Challengers list – a source of rich data on hundreds of US-listed stocks that have raised dividends each year for at least the last five consecutive years.
Financial freedom is largely a math problem: Once you have enough safe, growing dividend income to offset all expenses, you’re there.
I solved this math problem as early in life as I could, using the dividend growth investing strategy to become financially free and retire in my early 30s.
My Early Retirement Blueprint discusses all of that in detail.
I’m now in the very fortunate position of being able to live off of the five-figure passive dividend income the FIRE Fund – my real-money portfolio – generates on my behalf.
A lot of dividend growth investing involves buying and holding shares in the right businesses.
But buying when valuation is right is also a critical part of the equation.
And that’s because price is only what you pay, but it’s value that you get.
An undervalued dividend growth stock should provide a higher yield, greater long-term total return potential, and reduced risk.
This is relative to what the same stock might otherwise provide if it were fairly valued or overvalued.
Price and yield are inversely correlated. All else equal, a lower price will result in a higher yield.
That higher yield correlates to greater long-term total return potential.
This is because total return is simply the total income earned from an investment – capital gain plus investment income – over a period of time.
Prospective investment income is boosted by the higher yield.
But capital gain is also given a possible boost via the “upside” between a lower price paid and higher estimated intrinsic value.
And that’s on top of whatever capital gain would ordinarily come about as a quality company naturally becomes worth more over time.
These dynamics should reduce risk.
Undervaluation introduces a margin of safety.
This is a “buffer” that protects the investor against unforeseen issues that could detrimentally lessen a company’s fair value.
It’s protection against the possible downside.
Using our short, valuable time to achieve financial freedom by routinely buying undervalued high-quality dividend growth stocks can allow us to make the most of our limited time in this life.
Of course, the preceding information does presume that a basic understanding of valuation is already in place.
If it’s not, be sure to read through Lesson 11: Valuation.
Penned by fellow contributor Dave Van Knapp, it’s a very helpful guide that lays out valuation using simple terminology in order to help anyone more thoroughly understand what valuation is, how valuation works, and how to go about estimating the fair value of almost any dividend growth stock out there.
With all of this in mind, let’s take a look at a high-quality dividend growth stock that appears to be undervalued right now…
Broadridge Financial Solutions Inc. (BR)
Broadridge Financial Solutions Inc. (BR) is a global fintech company providing technology-driven infrastructure behind corporate and investing communications.
Founded in 1962, Broadridge is now a $25 billion (by market cap) communications pioneer that employs approximately 15,000 people.
Broadridge was spun out from former parent company Automatic Data Processing Inc. (ADP) in 2007.
The company reports results across two segments: Investor Communication Solutions, 74% of FY 2024 revenue; and Global Technology and Operations, 26%.
The company’s largest segment largely includes the processing and distribution of proxy materials to investors that hold positions in equity securities and mutual funds.
Since most securities in the US are held in the “street name” of brokerages rather than directly under the names of actual shareholders, communication and proxy voting must be coordinated across the broker/dealer, the issuer, and the beneficial owner.
Broadridge facilitates this.
It’s a bit of a niche service – one that a lot of investors don’t even think of – but it’s a vital one that Broadridge dominates.
The overwhelming majority of broker/dealers enlist Broadridge as a third-party agent to handle these communications.
To put this in perspective, Broadridge annually processes something close to seven billion regulatory and customer communications.
The company estimates it has a $200+ billion total addressable market, meaning it has no shortage of opportunities ahead.
Secular growth drivers include what I call the “Three Ds”: democratization of investing, digitization of communications, and data proliferation.
Unlike a lot of legacy businesses in the financial industry, rising direct indexing only serves to strengthen Broadridge because of the massive increase in retail investor participation.
This positions the company for strong revenue, profit, and dividend growth ahead.
Dividend Growth, Growth Rate, Payout Ratio and Yield
Already, Broadridge has increased its dividend for 19 consecutive years.
That dates back to its original spin off, meaning Broadridge has been a dividend payer and grower since the outset.
And the 10-year dividend growth rate of 12.5% shows what a strong dividend grower it’s been.
The impressive thing about this is, there’s been very little slowdown in the dividend growth over time.
Pretty much every dividend increase Broadridge hands out is a double-digit one.
It’s relentless.
And investors get to layer that double-digit dividend growth on top of the stock’s market-beating yield of 1.9%.
This yield, by the way, is 30 basis points higher than its own five-year average.
While this might not be super enticing for those who are more interested in income, I think a near-2% yield is very solid starting yield when the dividend growth rate is this high.
From what I’ve seen, double-digit dividend growth often requires an even larger sacrifice on yield.
Also, a payout ratio of 50% – a perfect balance between rewarding shareholders and retaining capital for growth – shows us a healthy dividend poised for much more growth ahead.
This is a terrific dividend profile right across the board.
Revenue and Earnings Growth
As terrific as it may be, though, the profile is mostly based on what’s happened in the past.
However, investors must always have the future in mind, as today’s capital ultimately gets risked for tomorrow’s rewards.
As such, I’ll now build out a forward-looking growth trajectory for the business, which will be of great aid when the time comes later to estimate fair value.
I’ll first show you what the business has done over the last decade in terms of its top-line and bottom-line growth.
I’ll then reveal a professional prognostication for near-term profit growth.
Amalgamating the proven past with a future forecast in this way should allow us to reasonably gauge where the business might be going from here.
Broadridge grew its revenue from $2.9 billion in FY 2016 to $6.9 billion in FY 2025.
That’s a compound annual growth rate of 10.1%.
Excellent top-line growth.
But it hasn’t been 100% organic, as the 2021 acquisition of front office trading technology firm Itiviti for $2.5 billion in cash boosted the sales base.
Meanwhile, earnings per share increased from $2.53 to $7.10 over this period, which is a CAGR of 12.2%.
Double-digit top-line and bottom-line growth.
How wonderful.
Moreover, growth has been extremely consistent.
It’s clear that Broadridge is experiencing secular tailwinds.
Looking forward, CFRA believes that Broadridge will deliver a 10% CAGR in its EPS over the next three years.
CFRA highlights recurring contracts, unique market positioning, and Broadridge’s role as essential “plumbing” for the digital financial world.
CFRA also sees the tokenization of assets as a long-term growth driver.
I’ll quickly note that Broadridge sports a 97% rate of recurring fee revenue retention, which reinforces the idea of just how resilient this business is.
While a 10% CAGR would be slightly lower than what transpired over the prior decade, this is still good enough to keep the double-digit dividend growth train going.
Pairing that with the starting yield of almost 2% is a low-double-digit total return annualized total return setup over the coming years, assuming a static valuation.
From my vantage point, it’s a high-quality compounder set to continue compounding.
Financial Position
Moving over to the balance sheet, Broadridge has a good financial position.
The long-term debt/equity ratio is 1.0, while the interest coverage ratio is approximately 9.
Cash adds up to 20% of long-term debt.
The company’s credit ratings are in investment-grade territory: BBB+, Fitch; Baa2, Moody’s.
I wouldn’t mind seeing a better balance sheet, but I have no major qualms with any of this.
Profitability is very robust.
Return on equity has averaged 32.1% over the last five years, while the net margin has averaged 10.7%.
ROIC is routinely in the mid-teens area.
A hallmark of a high-quality company is high returns on capital, and Broadridge is delivering.
This has been a reliable compounder, and I don’t see any evidence of that changing.
And with economies of scale, switching costs, barriers to entry, and entrenched relationships backed by contracts, the company does benefit from durable competitive advantages.
Of course, there are risks to consider.
Regulation, litigation, and competition are omnipresent risks in every industry.
Regulation, in particular, is an ever-changing constant for this business because of the very industry it serves.
On the flip side, due to its dominance of a niche, competition is somewhat limited.
The company’s revenue growth is dependent on the overall pool of securities and trend in security ownership, and a steady decrease in publicly-traded companies over the decades reduces the firm’s opportunity set.
A widespread recession could indirectly impact the company by way of less individual security ownership.
The balance sheet is mildly stretched, limiting the size and scope of future M&A opportunities.
The Itiviti acquisition introduces execution and integration risks, and Broadridge will have to rationalize what they paid.
Any future pressure on the fees that Broadridge charges could have an adverse impact on the company.
I don’t see any dealbreakers here.
And with the stock’s 20%+ decline from recent highs, the valuation makes this a better deal than usual…
Valuation
As a result of that drop, the P/E ratio has compressed to 25.2.
Low in absolute terms all on its own?
No.
However, compared to its own five-year average of 34.5, this is very low.
Also, relative to the growth and quality of the business, an earnings multiple of 25 is not egregious at all.
The P/CF ratio of 16.7 is also well below its own five-year average of 19.7.
And the yield, as noted earlier, is significantly higher than its own recent historical average.
So the stock looks cheap when looking at basic valuation metrics. But how cheap might it be? What would a rational estimate of intrinsic value look like?
I valued shares using a two-stage dividend discount model analysis.
I factored in a 10% discount rate, a 10-year dividend growth rate of 10%, and a long-term dividend growth rate of 8%.
Seeing as how Broadridge has been consistently handing out double-digit dividend raises for years, and considering the near-term expectation for 10% EPS growth, I think a 10% dividend growth rate over the next decade is a reasonable assumption to make.
Thereafter, however, it makes sense to back off a bit and presume a natural slowdown into high-single-digit dividend growth as Broadridge continues to mature and saturate.
I think it’s unlikely that Broadridge will disappoint on this, and there’s some room for upside surprise, but I also wouldn’t want to be more aggressive than this.
The DDM analysis gives me a fair value of $249.60.
The reason I use a dividend discount model analysis is because a business is ultimately equal to the sum of all the future cash flow it can provide.
The DDM analysis is a tailored version of the discounted cash flow model analysis, as it simply substitutes dividends and dividend growth for cash flow and growth.
It then discounts those future dividends back to the present day, to account for the time value of money since a dollar tomorrow is not worth the same amount as a dollar today.
I find it to be a fairly accurate way to value dividend growth stocks.
My analysis indicates some value after the sharp pullback .
But we’ll now compare that valuation with where two professional stock analysis firms have come out at.
This adds balance, depth, and perspective to our conclusion.
Morningstar, a leading and well-respected stock analysis firm, rates stocks on a 5-star system.
1 star would mean a stock is substantially overvalued; 5 stars would mean a stock is substantially undervalued. 3 stars would indicate roughly fair value.
Morningstar rates BR as a 5-star stock, with a fair value estimate of $249.00.
CFRA is another professional analysis firm, and I like to compare my valuation opinion to theirs to see if I’m out of line.
They similarly rate stocks on a 1-5 star scale, with 1 star meaning a stock is a strong sell and 5 stars meaning a stock is a strong buy. 3 stars is a hold.
CFRA rates BR as a 4-star “BUY”, with a 12-month target price of $300.00.
It’s interesting that I came out within pennies of where Morningstar is at. Averaging the three numbers out gives us a final valuation of $266.20, which would indicate the stock is possibly 22% undervalued.
Bottom line: Broadridge Financial Solutions Inc. (BR) is a high-quality company dominating a highly profitable niche. It has scale, high returns on capital, and recurring revenue nearing 100%. With a market-beating yield, a balanced payout ratio, double-digit dividend growth, almost 20 consecutive years of dividend increases, and the potential that shares are 22% undervalued, long-term dividend growth investors in the market for a reliable compounder should take a close look at this name after its sharp pullback.
-Jason Fieber
Note from D&I: How safe is BR’s dividend? We ran the stock through Simply Safe Dividends, and as we go to press, its Dividend Safety Score is 75. Dividend Safety Scores range from 0 to 100. A score of 50 is average, 75 or higher is excellent, and 25 or lower is weak. With this in mind, BR’s dividend appears Safe with an unlikely risk of being cut. Learn more about Dividend Safety Scores here.
P.S. If you’d like access to my entire six-figure dividend growth stock portfolio, as well as stock trades I make with my own money, I’ve made all of that available exclusively through Patreon.
Source: Dividends & Income
Disclosure: I’m long BR.
