- CSVI has raised its dividend for 49 consecutive years.
- Thanks to its rock-solid balance sheet, its healthy payout ratio, and its promising growth prospects, CSVI has ample room to keep raising its dividend for many more years.
- However, the stock is richly valued right now.
Despite the pandemic, the S&P 500 has rallied 48% in the last 12 months and thus it has climbed to new all-time highs, at a trailing price-to-earnings ratio of 42.0. As a result, it has become challenging for income-oriented investors to identify reasonably valued stocks with an attractive dividend. Computer Services (OTCQX:CSVI) has an exceptional growth record and is poised to become a Dividend King later this year. As it has promising growth prospects ahead, investors should put this stock on their radar. Nevertheless, due to its current rich valuation, investors should wait for a more opportune entry point.
Computer Services offers innovative technology, regulatory compliance solutions and digital banking solutions to regional banks and other corporate customers. The company signs multi-year contracts with its customers and offers them a wide range of services. As a result, it is costly and inefficient for the customers of Computer Services to switch to a competitor. This helps explain why Computer Services renews nearly all its contracts when they expire. In fact, when a customer terminates its contract, the most frequent reason is the acquisition of the customer by another bank, which is not a customer of Computer Services. In 2020, Computer Services renewed most of its partnerships, with contracts of average duration of more than nine years.
Thanks to the long duration of the partnerships of Computer Services, more than 90% of its revenues is recurring. This is an exceptional advantage, which renders the company markedly resilient to recessions and downturns, such as the ongoing coronavirus crisis.
In the most recent quarter, Computer Services grew its operating income 18% and its earnings per share 14% over the prior year’s quarter, primarily thanks to increased digital banking and payments processing revenues as well as lower marketing expenses, which resulted from the social distancing measures. In the first nine months of its fiscal year, Computer Services grew its earnings per share 12%, from $1.36 to an all-time high of $1.52. In other words, in a year in which most companies were severely hurt by the pandemic, Computer Services achieved record earnings.
It is also worth noting that Computer Services was one of the very few companies that have not stopped repurchasing their shares during the coronavirus crisis. In addition, Computer Services offered a special dividend of $1.00 per share (1.7% yield at the current stock price) at the end of last year. The continued share repurchases and the special dividend are testaments to the resilience of this high-quality company and the confidence of its management in its future prospects.
Computer Services has an exceptional growth record. The financial services company has grown its revenues, its earnings and its dividend for 20, 23 and 49 consecutive years, respectively. It is thus on track to become a member of the group of Dividend Kings in the third quarter of this year, when its next dividend hike is expected. The group of Dividend Kings includes only 30 stocks, which have raised their dividend for at least 50 consecutive years.
Computer Services has grown its earnings per share at a 10.0% average annual rate over the last nine years, from $0.81 in 2011 to $1.91 in 2020. Even better, the company has accelerated in recent years, as it has grown its bottom line at a 14.3% average annual rate over the last five years.
Moreover, thanks to its rock-solid balance sheet and its excessive free cash flows, the company continues to invest heavily in new product development to support its future growth. It is impressive that Computer Services has net debt (as per Buffett, net debt = total liabilities – cash – receivables) of only $31 million (just 2% of the market cap). The rock-solid balance sheet is important, not only for the financial health of the company, but also as a testament to the strength of the business model and the perfect execution of management. Most companies need to issue significant amounts of debt to fund their growth projects but Computer Services has such a strong business model that it funds its growth projects with its internally generated cash flows. The company has posted positive free cash flows every single year for more than a decade. It is also worth noting that its management recently stated that it expects to take advantage of the solid balance sheet to fund acquisitions and enrich the product portfolio.
Computer Services is currently trading at a trailing price-to-earnings ratio of 28.9, which is much higher than its 10-year average price-to-earnings ratio of 17.4. In fact, the current valuation of the stock is standing at a nearly decade-high level. It is thus evident that the market has already appreciated the strong business performance and the promising prospects of the company. Therefore, investors should wait for a correction of at least 10% of the stock, towards the technical support of $53, before initiating a position.
On the bright side, management recently stated that it views the stock as an attractive investment at current prices thanks to its growth trajectory and its strong financial position. As this is a high-quality management, its statement is significant, though it cannot be considered absolutely objective.
Computer Services has raised its dividend for 49 consecutive years. The company has grown its dividend at a 16.3% average annual rate over the last decade and at a 14.6% average annual rate over the last five years. It is thus evident that Computer Services has been raising its dividend at a fast pace.
In addition, thanks to its rock-solid balance sheet, its healthy payout ratio of 48% and its promising growth potential, Computer Services has ample room to continue raising its dividend for many more years. Nevertheless, due to its rich valuation, the stock is currently offering just a 1.7% dividend yield. Therefore, investors should not purchase the stock for its dividend right now.
Computer Services is a high-quality financial services company, which passes under the radar of most investors due to the lack of coverage by analysts. Due to the fully valued status of the broad market, the stock seems fully valued right now. However, income-oriented investors should put this imminent Dividend King on their radar for its exceptional performance record, its promising growth prospects and its strong balance sheet.
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