TipRanks Smart Dividend Newsletter – Edition #13
Hello and welcome to the 13th edition of TipRanks’ Smart Dividend – a weekly Newsletter providing you with investment ideas for safe-bet quality stocks that are outstanding dividend payers, compared to their peers.
Today’s dividend stock recommendation is the leading IT services provider to the telecom industry, which is also expanding to other spheres. The company we are recommending has been raising its dividends for over a decade, while its solid execution and strong fundamentals support the expected continuation of increasing shareholder compensation.
But first, let’s delve into a short update on our view of the markets, which will support our investment case.
Investment Thesis: Stronger for Longer
In the dynamic landscape of the stock market, there’s an enduring appeal to companies that radiate consistency, particularly when it comes to dividend policies. The allure of predictable returns, and the warm reassurance of a steady paycheck, are beacons to many investors. But dividends are merely one piece of the intricate puzzle of investment decision-making.
Although dividend are vital for income investors, a fundamental analysis of a company, taking into account its financial health, growth prospects, and competitive position, is of paramount importance. Without a robust understanding of these underlying dynamics, investors risk being swayed by superficial indicators, potentially leading to ill-timed investments.
Additionally, the near-term economic horizon is casting its shadow on investment strategies. With the Federal Reserve likely maintaining higher interest rates for an extended period, there’s greater pressure on stocks. However, companies boasting solid balance sheets—those with minimal debt, ample reserves, and efficient operations—are better positioned to withstand these headwinds. Even if short-term market sentiment drives their stock prices down, their intrinsic value and strength remain a draw for discerning investors.
Among the myriad of industries open for investment, the IT services sector stands out, not merely for its centrality in today’s digital age but for its companies that have demonstrated remarkable resilience. Several IT service providers have not just survived but thrived, irrespective of market upheavals, navigating through storms while steadily increasing their dividends. Companies that marry a stable dividend policy with strong fundamentals and a proven track record of adaptability, like many in the IT services domain, present a compelling case for income investment.
Quality Dividend Stock: This Week’s Top Pick
Amdocs Ltd. (DOX) is a multinational corporation that provides software and services solutions mainly for communications, entertainment, and media industries. It focuses on the development, implementation, and management of software and services associated with business support systems, operational support systems, service-driven network and other network solutions, entertainment offerings, and digital solutions.
Amdocs is a leading software and software services provider, whose solutions cover a wide range of customer needs and functions, including migration to the cloud, adapting to 5G technology, digitalizing and automating operations, and more. The company helps its customers create new services, simplify operations, provide unified digital customer experience, build media content, make monetization process more effective, and incorporate Generative Artificial Intelligence (AI) into their operations. Amdocs leverages its partnership agreements with industry leading companies like Microsoft (MSFT), Alphabet (GOOGL), and Amazon (AMZN) to deliver added value to its clients. For instance, its recently launched Gen AI framework for Telecoms, “amAIz,” has been developed in partnership with Microsoft.
Amdocs was founded in Israel in 1982 and went public on NYSE in 1998, moving to the NASDAQ in 2014. The company is headquartered in Saint Louis, MO, and has offices in a number of U.S. states, as well as across the Americas, Asia Pacific, Europe, Africa, and the Middle East; in all, the company works with customers from over 90 countries. It has a market capitalization of $10.4 billion, which makes it a large-cap company, and about 30,000 employees. Amdocs belongs to the IT sector (Industry: IT Services).
Overall, the IT services sphere is one of the most promising in terms of growth. The advent of automation and a dramatic change in client management, coupled with the rising need for modernization and increase in effectiveness, as well as ever-rising demand for IT and financial risk protection, provide a premise for consulting and professional services proliferation. The global IT professional services market is expected to grow from $822 billion in 2022 to $1.7 trillion in 2030, displaying a CAGR of 9.1%. The largest segment of IT services, contributing almost 70% to the overall market size, is the cloud. The largest geographical market is North America, responsible for almost 40% revenue share.
Historically, Amdocs’ caters to the telecom industry. The company’s customers include numerous Tier 1 telecom operators in the world, such as Deutsche Telekom (DTEGY), Telefónica (TEF), Vodafone (VOD), América Móvil (AMX), and others. Notwithstanding the company’s global reach, its largest market remains the U.S. and Canada, where it derives close to 70% of revenue. In North America, Amdocs engages with all main operators, including AT&T (T), T-Mobile (TMUS), Bell Canada (BCE), Comcast (CMCSA), and many more. AT&T and T-Mobile U.S. are Amdocs’ largest customers, accounting for roughly 25% and 20% of its revenue. The need to modernize, adapt to the 5G standard, and transfer to the cloud large legacy system is a challenge for telecom firms, but an opportunity for the companies with vast expertise in this sphere, such as Amdocs. DOX is the largest global IT services provider to the communication service providers (CSPs), commanding a market share of 12% in this highly segmented market.
Despite the abundance of long-term contracts with major telecoms, and an accompanying steady and predictable revenue stream, DOX is looking to further grow and broaden its exposure to the non-telecom market; it achieves these goals organically through dedicated resources, as well as through acquisitions. Since the beginning of 2000s, Amdocs has acquired over 20 companies, with the takeovers helping it to expand its geographical presence, as well as its products and services suite. In addition, over its long history of working with telecommunications companies, Amdocs has developed products and services that can be enormously valuable to customers from other industries that need to update their legacy systems and operations. Thus, several years ago Amdocs entered the financial services solutions space, where its expertise is much needed and easily applicable.
Moreover, Amdocs has been paying and steadily raising dividends since 2012. In the past decade, DOX’s dividend payouts have grown at an average annual rate of 12.3%; in the last five years, the rate of dividend growth stood at 12.1% per annum. The latest dividend increase was in March 2023, when the payout rose by 10%; in March last year, it grew by 11%. Amdocs’ current dividend yield is 2.01%, versus the Information Technology sector’s average of 1.0% and IT Services industry average of 0.81%. With its reasonably low payout ratio of 29%, DOX’s dividend payments are well-covered by both earnings and free cash flow, while the company retains enough profit to invest in growth opportunities and business development. The company’s solid financials and a more than a decade-long history of non-stop dividend growth support the outlook for further dividend increases down the road.
In addition to dividends, Amdocs rewards its shareholders with generous share repurchases. In fiscal Q3 2023 (ending June 30), the company bought back its shares for the amount of $129 million under an existing authorization, leaving roughly $156 billion for stock repurchases in fiscal Q4. Despite the funds still available, the management said that the company’s Board has authorized a new share repurchase plan of $1.1 billion with no stated expiration date, reflecting its confidence in the future success of Amdocs, and the company’s ability to generate cash. Taking into account the dividend payouts and the share repurchases, the company’s total annual shareholder yield stands at a high 5.7%.
DOX’s financial health is bordering on perfect. It has a very low debt-to-equity ratio of 17.7%, with its small debt covered by operating cash flow with a wide margin. As for the capital efficiency and profitability metrics, Amdocs’ ROE of 16% and ROA of 9% are in line with its industry averages, whereas its EBITDA margin of 18.9% and Net Profit margin of 11.8% are much higher than the average for the sector.
Amdocs has been growing revenues at an average rate of 4% in the past five years, while earnings-per-share rose by 10.2% on average. DOX reported fiscal Q3 2023 financial results on August 2, 2023, beating both revenue and EPS estimates. The company has exceeded analysts’ EPS estimates in all quarters for which these estimates have been available barring two quarters in the Covid-19 time. In fiscal Q3, the company reported an annual increase of 6.5% in total revenue; its EPS surged 24% year-on-year. The company has ample liquidity, thanks to its cash-generating abilities; it ended the fiscal Q3 with cash and cash equivalents of $518 million. Its Free Cash Flow at the end of the last quarter was $144 million, an increase of 14% year-on-year.
Amdocs’ stock reached its all-time high on June 30, 2023, and has been falling since then on profit-taking, as well as due to its management’s moderate outlook with regards to the fiscal 2024 revenue growth. In the past three years, DOX has risen 40%. As a result of the recent month-and-a-half’s 13% decline in the price, the stock has given back part of its previous gains and is down 3% over the past 12 months. However, we view these declines as an opportunity for entry at a lower valuation before the stock surges again: top Wall Street analysts, as scored by TipRanks, rate the stock a “Strong Buy” and forecast an average upside of 25.8% in the next 12 months.
DOX is now attractively valued at TTM P/E of 18.3 and Forward P/E of 18.4, representing a 25% discount to its sector averages. This value-play price may not be present for much longer, as the company’s strong fundamentals and higher-than-average for the sector shareholder compensation are expected to support the stock further down the road.
In conclusion, we believe that long history of robust performance, solid management, outstanding adaptive capabilities, extensive Tier 1 client base, and high revenue predictability, coupled with high and rising dividends and generous buybacks, make this IT services veteran a compelling income investment opportunity.
Disclaimer
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