They always come back.
No, not zombies or vampires or werewolves. I'm talking about proxy circulars, which fill postal boxes each and every spring. (And, increasingly, inboxes.) The big Canadian banks have begun sending them out, and thousands of other companies that closed out their fiscal years in December will follow in the weeks after.
Surely there are companies that handle the drudgery of sending out these circulars and collecting votes? Yes, indeed – there's one large one that handled more than 90 per cent of all the work last year in North America. That means it processed the proxy votes for more than 600 billion shares in 2011.
The best part of this is that the company, Broadridge Financial Solutions Inc., remains little-known, even as it grows profits (by double digits, as is expected this year) and boosts its dividend (four times in four years).
Based, believe it or not, in Lake Success, N.Y., Broadridge started nearly 50 years ago as the "Brokerage Services" division of Automatic Data Processing, processing stock trades (a business it still engages in – more on that later). It moved into proxy services in 1989; ADP spun off Broadridge in 2007.
Today, its Investor Communications Services division provides about 70 per cent of the company's revenue and profits. It benefits from the practice of most shares being held not in the names of individual shareholders, but in "street name" at the various brokerage houses; companies pay brokerage firms to send out proxies, and brokerages, invariably, choose Broadridge for the task. (The company is similarly dominant in the business of mutual fund documents.)
The move to electronic proxy voting, Broadridge says, boosts profitability. Roughly half the division's revenue comes from low-margin postage reimbursement; eliminating the mailing shifts the mix to the higher-margin fees for service.
The business is extraordinarily steady – after all, public companies weren't allowed to cancel their annual meetings to save money during the financial crisis – but there is some variability: Mutual funds issue more or fewer proxies in any given year, depending on whether they've changed managers or have other needs for interim communications with fund holders.
And as it happens, the company's fiscal 2011, which ended last June, was an unusually quiet one for these "event-driven revenues." Ian Zaffino at Oppenheimer & Co., who has a "buy" rating and $27 target price, believes "there is significant upside to numbers if … event-driven volumes recover."
There seems to be limited growth potential in a business that Broadridge already dominates (although management disagrees, saying that related businesses, including tax reporting and other types of investor communications, represent a $10-billion market, compared to the $1.6-billion the Investor Communications segment brought in during fiscal 2011.)
But Broadridge's additional business of handling securities transactions lends credence to the idea that the company is, as Christopher Donat of Sandler O'Neill Partners puts it, "more than a proxy processor." (Mr. Donat has a "buy" and a target of $27.)
Broadridge says it ranks number one in the United States in processing both equity and fixed income transactions, and number one in Canadian equity transactions as well.
Yet unlike the proxy business, roughly half the transactions are still handled "in-house" at the brokerage houses themselves, giving Broadridge a chance to make the case for outsourcing. (The company sees a global $14-billion market in businesses related to this segment, where it booked just about $600-million in its most recent fiscal year.)
You don't have to completely embrace management's rosy scenario, however, to see potential. As noted, the company is coming off a year with below-normal levels of event-driven proxy revenue, as well as relatively light trading volume (which crimps processing revenue).
The company's current-year guidance is for earnings per share between $1.50 to $1.60. If event-driven revenue remains low, management says, $1.80 is possible for the year starting July 1; if there's a rebound, that figure could be $2.
The shares, at the current price of $24, trade for about 13 times the conservative case, and 12 times the more optimistic number. At the same time, the company sports a dividend yield of about 2.7 per cent, having boosted the payout four times since the ADP spinoff.
Investors often curse their piles of proxies that arrive every spring. Why not compensate by making some money owning the company that's sending them?