2023-07-18 17:18:44 ET
Summary
- FactSet Research, a primary data provider to the financial industry, has a long history of outperforming the markets, with shares up 104.8% in the past five years and 282% in the past decade.
- According to CFRA, FactSet has grown its top line for 42 consecutive years and its bottom line for 26 consecutive years.
- FactSet boasts a 23-year dividend growth streak.
Today I want to shine a light on a stock that I don’t own (yet), but certainly appears to be worthy of inclusion in a long-term investors’ dividend growth portfolio.
I’m talking about FactSet Research Systems ( FDS ) which is one of the primary data providers to buyside analysts, sellside analysts, wealth managers, bankers, hedge funds, private equity funds, and other professionals across the financial industry.
FactSet was founded in 1978, went public in 1996, and was added to the S&P 500 in 2021.
This stock has a long history of outperforming the markets.
During the past 5 years, FDS shares are up by 104.8%, better than the SPY’s 61% gains.
During the last 10 years, FDS is up by 282%, beating the SPY’s166% gains by a wide margin.
And, scrolling out to the “Max” time frame on Seeking Alpha we see that these shares have posted gains that are greater than 9000%.
Seeking Alpha
Needless to say, long-term shareholders here are very happy with their investments and moving forward I believe that FDS has the potential to continue generating alpha.
Why have shares performed so well?
In short, fundamental growth.
A research note on the company from CFRA (one of FactSet’s competitors) sums up the company’s illustrious history nicely:
The CFRA analyst wrote, “FDS has managed to grow its top line for 42 consecutive years and its bottom line for 26 consecutive years as its revenue base is over 98% recurring and its costs have a large variable component.”
Frankly put, it doesn’t get much better than that.
Those reliably growing fundamentals have allowed FDS to sustainably raise its dividend for 23 consecutive years now.
Show me a company with these types of historical compounding streaks in place and I’m going to want to own shares.
This compounding success is why FDS is moving up my personal watch list and in this article I’ll highlight my bullish outlook on shares, my fair value estimate, and my plan for (hopefully) building a FDS position in my personal portfolio moving forward.
Company Overview
This company offers proprietary and third party data, as well as trade execution, risk management, real-time news, and historical analysis which supports the work done across many financial/investment oriented businesses.
As a practical example, anyone familiar with my articles knows that I use FAST Graphs a lot to highlight fundamental trends and show where fair value lies. Well, all of the data that is provided in those graphics comes from FactSet.
High switching costs for enterprise clients who use FactSet’s data and applications contributes to the company’s success.
FDS sports a roughly 90% retention rate, pointing to the strength of its moat.
There is also a network effect in place when it comes to applications like subscriber-only messaging that is offered in this space.
Looking at the competitive landscape, it’s interesting that FactSet is the smallest of the well-known brands here (in terms of market share).
Bloomberg dominates the financial data/news space with a market share of approximately 33%.
Up next we have Refinitiv Eikon with a ~20% market share.
Then S&P Capital IQ/Market Intelligence with a ~6% share.
And finally FactSet, with a 4-5% share.
Bloomberg is known for its sort of all or nothing approach with the industry, which means that its service is the most expensive (costing ~$25,000/year per seat for terminal access).
But, there is certainly a market for an a la carte approach, offering end users only what they need for smaller prices and this appears to be a way that FactSet can continue to take market share (Bloomberg hasn’t adopted this approach, yet).
What’s more, I think FDS’s relatively smaller size is intriguing because I can imagine a world where this company is an M&A target.
I have to assume one of the larger exchanges/brokerages would love to incorporate the proprietary data threads into the offerings that they make to clients.
I could also imagine a future where a big-tech company interested in big-data collection and distribution scoops up a company like FactSet to bolster its SaaS portfolio.
I never make investments based upon M&A speculation, but it is nice to know that the upside exists, due to FDS’s current market cap and market share position within its respective industry.
Risks:
Due to FactSet’s reliance on contracts from investment managers and analysts, the company’s sales could be economically sensitive (when the market performs poorly, any of these fee-based business clients are going to have to cut spending).
But, the fact that FDS operations on a subscription model helps to smooth out this potential cyclicality.
The ongoing shift from active investment management to passive (driven by the proliferation of low-cost ETFs) has the potential to hurt FactSet’s buyside business.
This threat is certainly real; however, this trend has been in place for a decade now and throughout this period, FactSet has continued to grow its top and bottom lines at an admirable pace.
A threat that is more abstract is the potential negative impact that the rise of artificial intelligence could have on FactSet’s business model.
When attempting to apply second-level thinking to FactSet’s business model and competitive moat, I can imagine a future where it’s fairly easy to teach an A.I. program to scrape the internet (looking at the filings of publicly traded companies) and aggregate this data quickly and easily, reducing the need for a company like FactSet which does that for you.
Although I find myself thinking about the potential impact (both positive and negative) of A.I. on the companies in my portfolio and of my watch list, I will also note that the competitive threats related to A.I. are incredibly hard to predict due to the uncertain nature of its capabilities moving forward.
Oftentimes, I like to take a “better safe than sorry” approach when it comes to theoretical risks in the market.
There are hundreds of wonderful companies to own out there, so if I’m ever feeling nervous about one I tend to stay on the sidelines and invest my cash elsewhere.
But, as I’ll show you in a moment, there are few companies in the world that have produced more reliable fundamentals than FDS over the years and therefore, I don’t want to potentially overreact to a perceived threat and miss out on a solid opportunity.
FactSet’s leadership and management team have proven themselves to be more than capable of growing the business in the face of numerous headwinds throughout the last 45 years and as I like to say, excellence never happens by accident.
With that in mind, if I had to guess I’d say that it’s likely that people in charge of FactSet will foster ongoing innovation and adoption of new technologies, allowing the business to evolve (and grow) as time moves on.
For instance, this week FactSet made a M&A move, acquiring idaciti , a SaaS (software as a service) data collection/visualization firm which uses machine learning to increase the depth of its proprietary offerings and improve its AI-related data collection methods.
In general, I love these asset-light, subscription based (predictable), high margin business models; however, I’d be remiss if I didn’t mention threats, because as great as FDS’s historical growth has been, no company is perfect and all equity investments carry risk.
Amazing Fundamentals
So, with the potential bad news out of the way, let’s talk about what excites me most about FDS as a potential investment.
As the CFRA note said, FactSet has a nearly perfect fundamental growth record in recent decades.
Looking at the Graph below you’ll notice that this isn’t token growth.
FAST Graphs
Source: F.A.S.T. Graphs
FDS has produced double digit y/y EPS growth during 16 out of the last 20 years.
During the last 20 years, FDS has posted an EPS CAGR of 14.7%.
With that sort of growth in mind, it shouldn’t be a surprise to anyone that these shares have outperformed the market.
The Dividend
This double digit fundamental growth has supported reliably growing shareholder returns.
As I said, FDS is currently on a 23-year dividend growth streak.
And due to the stock’s low forward EPS dividend payout ratio (just 26%) and the stock’s ongoing double digit growth prospects, I think that it’s extremely likely that FDS continues to grow its annual dividend, becoming a Dividend Aristocrat in a couple of years.
Over the last 5 years, FDS has provided shareholders with a 9.5% dividend growth rate.
FDS’s 10-year DGR is approximately 11.5%.
And over the last 20 years, FDS’s dividend growth CAGR is approximately 18.2%.
These are all fantastic results and this is why I would be more than happy to own FDS shares, despite the stock’s relatively low 0.95% yield.
Oftentimes, when I write about low-yielding stocks like FDS, income oriented investors seem uninterested at these sub-1% yields.
But, it’s very important to understand that low yields like this on blue chip dividend growth stocks aren’t a product of a lack of generosity, but instead, significant capital gains.
As you can see below, not only has FDS been generous with its dividend, but its buyback as well.
FactSet Research Q1 ER Presentation
In other words, a low present-day yield is a nice problem to have for long-term shareholders.
Someone who bought FDS shares 20 years ago would have paid $15.70/share. Today, FDS’s annual dividend is $3.92/share. Therefore, the yield on cost of that long-term investment is nearly 25%.
Someone who bought FDS shares 10 years ago would have paid $92.27 and would be sitting on a yield on cost of approximately 4.25% today.
When a dividend is compounding at a 10-15% rate low yields can compound into significant sources of passive income in a relatively small amount of time.
I believe that FDS is likely to continue to provide ~10% annual dividend growth moving forward, meaning that today’s ~1% yield will compound at a rapid rate for patient/disciplined investors.
Because of my personal focus on company quality, reliable fundamental growth, and long-term, sustainable dividend growth I’m often focused on relatively low yielders like FactSet.
My long-term investment horizon provides this luxury; however, I believe that it’s important for retirees to maintain dividend yield diversity/growth prospects within their portfolios as well and therefore, because of its dividend safety and growth prospects, I think a stock like FDS is well suited for just about any dividend portfolio.
Valuation
Above you'll notice that the black line (share price) is above the blue line (FDS’s 20-year average P/E of 26.5x) potentially signaling overvaluation (at least, on a historical basis).
But, when you zoom in on a 5-year chart that changes…
FAST Graphs
Source: F.A.S.T. Graphs
FDS’s blended P/E of 28.25x is below the stock’s 5-year average of 29.65x, which could be factoring into the stock’s recent rally.
According to Yahoo Finance there are 15 analysts who cover FDS shares.
The average price target on FactSet Research on Wall Street is $441.22, pointing towards another 5% of upside.
Nick’s Plan
However, because FDS’s forward looking growth estimates are below the long-term average growth rate (currently, analysts are calling for 10-12% growth over the next 3-5 year period which is below that long-term 15% rate) I am not willing to pay the recent premiums placed on shares.
To me, this slowing growth warrants a slight discount to historical averages and therefore, instead of paying 26-29x for FDS shares, I’d like to initiate my (eventual) stake in FDS at the 25x threshold.
It’s always difficult to place a fair value multiple on a high growth stock that is maturing and experiencing decelerating growth, but to me, the 25x level seems appropriate for a high quality company with ~12% growth prospects moving forward.
That represents a ~2.0 PEG, which is towards the upper limit of what I’d be willing to pay for any stock, but to me, FDS’s quality metrics warrant the premium valuation.
If we apply the 25x multiple to the consensus estimate for FDS’s fiscal 2023 EPS of $15.08 we get $377.00.
That’s where I’d like to begin accumulating shares.
That also happens to coincide with FDS’s current 52-week low (I don’t necessarily think this is a coincidence; I suspect that shares bounced off of that level because a lot of people thought that 25x was a solid buying opportunity).
I’d happily be aggressive at that multiple, likely buying a ~50% stake, or 0.50% of my total portfolio value.
Then, at 22.5x, or ~$340/share, I’d be happy to average down and add another 25% to my stake.
At the 20x level, or $301, I’d be happy to fill out my position with another 25% weighted purchase.
And then, at 18x, or $271, then finally 15x, or $226, I’d happily go overweight with aggressive purchases (0.50% TPV), ultimately pushing my FDS weighting up to the 2% area.
Do I expect to see any of these prices in the near-term?
No, I do not.
Sell-offs on blue chips like this one are rare and I definitely don’t think that anyone should hold their breath while they wait to see a 20x multiple arrive for FactSet shares.
But, I think that 25x level is possible in the near-term…it wasn’t long ago that FDS was trading in the $380 area.
And in general, if you don’t have a plan in place before a sell-off occurs then you’re unlikely to fully take advantage of it when the moment occurs.
Preparation can help investors overcome the emotional response to a sell-off (fear).
If/when FDS sells off, I want to be a buyer and doing this work ahead of time ensures that this will happen.
Conclusion
Last week, when I added an FDS article to my content schedule, shares were trading in the $390 range (tantalizingly close to my first-purchase target).
Unfortunately (for people like me who want to buy lower), these shares have rallied roughly 4.5% during the last week.
With that in mind, I know this article is no longer timely or super actionable.
I apologize for that; however, even with this bullish momentum pushing shares away from my entry-level buy target, I still think it’s worthwhile to finish up the piece and put FDS on the radar of my followers.
Without a doubt, this is one of the highest quality DGI stocks in the market.
This stock is near the top of my list of companies to accumulate in the event of a future macro sell-off (where the tide lowers all boats) and I think that anyone who is interested in reliably increasing dividends should begin doing due diligence on FactSet Research.
For further details see:
FactSet Research: One Of The Best Dividend Growth Stocks That You've Never Heard Of