Buy Thomson Reuters for capital gains and dividends

Thomson Reuters, one of our Key financial services stocks, is expected to earn record profits this year and next. This and excess cash flow will let it continue to reward its shareholders with attractive and growing dividends and share buybacks. Thomson remains a ‘buy’.

Financial_Services_StockWe regularly review Toronto- and New York-based Key stock Thomson Reuters (TSX—TRI; NYSE—TRI). Since we published our March 10 issue, its shares have risen by 4.1 per cent. This gives them upwards price momentum, but makes them more costly. Then again, the company is expected to earn record profits this year and next. It raises its dividend each year. Thomson remains a buy for long-term share price gains and attractive growing dividends.

Thomson bills itself “the world’s leading source of news and information”. (Competitor Bloomberg would likely say that it is the leader.) Thomson writes: “Our customers rely on us to deliver the intelligence, technology and expertise they need to find trusted answers.”

One plus with Thomson is that it changes with the times. It was once a large newspaper chain. As information technology grew, the company transformed itself to profit from this change.
Thomson continues to evolve.

In the three months to March 31, Thomson earned an adjusted $458 million, or 63 cents a share (all numbers in US dollars unless preceded by a C). This was up by 37 per cent from adjusted earnings of $351 million, or 46 cents a share, a year earlier.

Revenue grew while costs declined

President and chief executive officer Jim Smith said that revenue “growth, coupled with savings from our transformational programs, led to a significant improvement in profitability and earnings per share this quarter”. Indeed, revenue rose by two per cent, excluding currency changes. The lower costs raised the underlying profit margin by four percentage points, excluding currency changes. Underlying earnings climbed in all three operating divisions: Financial & Risk; Legal; and Tax & Accounting.

Thomson’s earnings per share increased much more than its total earnings. That’s because it continues to buy back its shares. In the first quarter, the company spent $284 million to repurchase 6.8 million shares. The number of diluted weighted-average shares went down to 729 million. That’s down from a peak of more than 833 million shares in 2011. We expect Thomson to continue to buy back its shares. This will raise its earnings per share growth.

Thomson has raised its dividend each year for decades. It currently pays $1.38—or C$1.75 a share. This yields an attractive three per cent. We expect the company to remain a ‘dividend aristocrat’. It continues to generate more cash flow than it needs.

Thomson’s net debt-to-cash-flow ratio is 2.6 times. This largely reflects a temporary drop in its cash flow. It contributed $500 million to its defined benefit pension plan. Exclude this and the company’s net debt-to-cash-flow ratio is 2.3 times. That’s above our usual comfort zone of two times or less. But Thomson generates steady cash flow in over 100 countries. This diversification reduces its risk.

Its earnings are now rising more quickly

Thomson expects to achieve adjusted earnings of $2.35 a share in 2017. This works out to C$2.98 a share. That represents respectable earnings per share growth of 11.2 per cent. Based on this estimate, the shares trade at a hefty price-to-earnings, or P/E, ratio of 19.6 times. Next year, its earnings are expected to climb by 9.4 per cent, to $3.26 a share. Based on this estimate, the shares trade at a better P/E ratio of 17.9 times. The MGI (Marpep Growth Index) of 0.5 suggests that the shares aren’t particularly cheap.

The consensus recommendation of seven analysts is ‘buy’. We agree. Thomson Reuters remains a buy for long-term share price gains as well as attractive and growing dividends.

This is an edited version of an article that was originally published for subscribers in the July 28, 2017, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.

The Investment Reporter, MPL Communications Inc.
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