Background

There are some exciting companies in the Fledgling Investor Portfolio. Tesla and Facebook spring to mind.

Broadridge Financial Services isn’t one of them.

The company provides services and infrastructure to banks, broker-dealers, mutual funds and corporate issuers.

The business has two main activities:

1. Handling communications with shareholders
2. Processing trades in securities

The services provided by Broadridge take a lot of administrative pain out of businesses that require efficient, accurate data-processing.

For these businesses, processing data is not an ancillary process, it is the core business activity.

Customers see Broadridge as a valuable partner with a solid track record. They are unlikely to take on the risk and disruption entailed with a move to another provider.

Management

The CEO, Timothy C. Gokey has been with Broadridge since 2010, and was appointed to his current position in 2019. The CFO, James M. Young joined Broadridge in 2014, having previously held senior positions at Visa.

This management team may not be lighting the sort of fires that we expect from a Zuckerberg or a Musk, but they have a solid track record of execution over a number of years.

Financial Performance

Although the company’s share price has been volatile over the last few years, its general long term performance has been exemplary – handily outperforming the S&P over 5 years and 10 years. Consistent long-term price appreciation like this inspires a lot of confidence.

The company’s performance as a business has been equally solid, with cumulative annual revenue growth in the high single digits over recent years.

Outlook

The board has a strategy of maximising shareholder returns by deploying its capital smartly. According to circumstance, the company uses its excess cash for share buybacks, increasing the dividend, or tuck-in acquisitions. The current dividend yield of just over 2% gives a handy boost to overall returns, and is likely to keep rising in the future.

And the business is not resting on its laurels – continuing its strategy of making acquisitions. At the same time the business is investing in new technologies such as blockchain, to enable the business to keep its position as a leader in its market.

Problems and Pitfalls

Any strategy that involves growth by acquisition has its risk. Acquired businesses need to be integrated smoothly in order to achieve the improvements in efficiency and operating margins that the company is seeking to achieve.

The company has a dominant position in the market which creates a double problem. On the one hand significant growth can be achieved only by adding additional services. On the other hand, the emergence of a disruptive competitor could pose a significant threat to its core business.

The Bottom Line

Broadridge has an entrenched position in a niche business, giving it a fairly wide moat. Its clients place a high priority on efficient, accurate processing of information, so are unlikely to risk moving to a competitor.

As technology advances, Broadridge has scope to increase the range of services that it can offer. The business generates good cash flow, and has a competent, experienced management team with a solid track record.

The Fledgling Investor portfolio has a strong weighting towards high-growth businesses, often with a strong technology bias. This is not by accident – these are the sort of companies that have produced superior returns in the past, and are the businesses that are most likely to produce superior returns in the future.

Broadridge is a different type of business. Whereas Tesla or Facebook are sports cars – Broadridge is more of a Grand Tourer. If the weather takes a turn for the worse, the sports cars may find themselves in a ditch, while the GT ploughs sedately on to its destination.

Broadridge provides useful balance within a generally aggressive, growth-orientated portfolio.