Buy global stock Thomson Reuters for gains and income

Thomson Reuters reported lower earnings in the first half of 2015. Had foreign exchange rates remained unchanged, its earnings per share would’ve gone up by 10.3 per cent. Among dividend paying multinational corporations, its shares remain a buy for price gains plus high and rising dividends.

We regularly examine Toronto-based global stock Thomson Reuters (TSX─TRI). Since we published our April 10 issue, its shares have risen by 6.1 per cent. Thomson Reuters, or TR, is a global provider of intelligent information for businesses and professionals. Its higher-priced shares remain a buy for further long-term price gains as well as attractive and rising dividends.

In the six months to June 30, TR earned an adjusted $763 million, or 96 cents a share (all numbers are in U.S. dollars unless preceded by a C). This was down marginally from adjusted earnings of $789 million, or 97 cents a share, a year earlier. But this was largely due to a negative foreign exchange rate impact. Had exchange rates remained the same as last year, the company would’ve earned an adjusted $1.07 a share—up by 10.3 per cent.

The reported earnings per share fell less than total earnings. That’s because TR spent $696 million to buy back 17.3 million of its shares in the first half of 2015. In the year to May 28, it spent $1.16 billion to repurchase 30 million shares. Now the company can buy up to 30 million shares until May 27, 2016.

It earned more as it bought back shares

President and chief executive officer James Smith said, “Our results are in line with our full-year expectations, and on a pre-currency basis, each of our four operating units reported growth [at the same time] for the first time in more than three years.” In the first half, the Financial & Risk business earned an underlying operating profit of $506 million; Legal, $476 million; Tax & Accounting, $149 million; the Intellectual Property & Science business earned an underlying operating profit of $113 million.

In the first half, TR’s reported revenue declined by 3.3 per cent, to $6.082 billion. But had foreign exchange rates remained unchanged, its revenue would’ve risen by two per cent. In 2015, the company expects positive organic revenue growth.

TR is what’s known as a ‘dividend aristocrat’. That’s because it raises its dividend each year and has done for decades. The company currently pays US$1.34 a share. That works out to C$1.76 a share. Divide that by the share price and you find that it yields nearly 3.2 per cent. That’s attractive in this low-interest-rate environment. This yield will just get better—should the share price remain the same. But in fact we expect income-seeking investors to bid up TR’s shares.

Mr. Smith is upbeat about TR’s outlook. He said, “We are entering the second half of 2015 from a position of strength and will continue to prioritize resources behind our highest-growth opportunities.”

TR should earn more this year and next

TR is not cheap. It’s expected to earn an adjusted C$2.67 a share this year. That’s up from an adjusted C$2.43 last year. Based on this year’s earnings estimate, the shares trade at a high forward price-to-earnings ratio of 20 times. In 2016, the company is expected to earn $3.03 a share. Based on this estimate, the shares trade at a forward price-to-earnings ratio of 17.6 times. This seems reasonable for a company that uses its prosperity to reward its shareholders with dividend increases and share buybacks.

And it generates excess cash

TR holds cash of $1.127 billion. It also carries total debt of $8.535 billion. As a result, the company’s net debt stands at $7.408 billion. This is 2.7 times its cash flow of $2.769 billion over the last four quarters. This debt is reasonable given TR’s predictable and recurring revenue.

What’s more, TR’s cash flow exceeds its capital expenditures and dividend payments on common and preferred shares. Excess cash flow makes it likely that TR will continue to reward its shareholders in the years ahead. 

 

The Investment Reporter, MPL Communications Inc.
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