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Computer Services: A Would-Be Dividend Aristocrat

Published by Nicholas McCullum on April 17, 2017

The Federal Reserve increased interest rates in March, and last December as well. Without a doubt, interest rates are on the rise.

Many investors are looking to the financial industry to capitalize on this trend. Large-cap banks like Wells Fargo (WFC) and J.P. Morgan (JPM) see increases in their net interest margins as benchmark interest rates move upwards, which will in turn boost earnings-per-share and shareholder returns.

One financial stock that might not immediately come to mind is Computer Services (CSVI). While not a lender itself, Computer Services provides technology solutions to financial institutions and fintech companies.

This stock, while not exceedingly well-known, has a phenomenal dividend history. The company was founded in 1965 and has increased dividends for 45 consecutive years.

Long-time Sure Dividend readers might be curious as to why the company has not been featured in our ‘Dividend Aristocrats in Focus’ series. Recall that in order to be a Dividend Aristocrat, a company must:

Since Computer Services is a small-cap stock with a market capitalization of ~$607 million, it is not in the S&P 500 nor does it meet the index’s size & liquidity requirement. It does meet the Dividend Aristocrats’ most important criterion, though – 25+ years of consecutive annual dividend increases.

You can see the list of all the ‘real’ 51 Dividend Aristocrats here.

Computer Services ranked as a top 10 stock according to The 8 Rules of Dividend Investing in the most recent Sure Dividend Newsletter. This article will analyze the investment prospects of Computer Services in detail.

Business Overview & Current Events

Computer Services provides services for regional banks, including transaction processing and compliance services.

The company recently reported a solid (but not fantastic) year for fiscal 2016. Earnings-per-share increased by 5% (from $1.97 to $2.07) and company-wide net income increased from $27.8 million to $29.1 million.

Other details about the company’s recent financial performance can be seen below.

CSVI Financial Summary

Source: Computer Services 2016 Financial Summary

Because of the way that Computer Services’ earnings calendar is structured, the company is well into its fiscal 2017. On January 5, the company reported revenue growth of 11.9% year-on-year and earnings-per-share growth of 34.1% for the third quarter of fiscal 2017.

Computer Services will release its next earnings report around May 3, 2017. This will be the final earnings report for the company’s fiscal 2017, and the company’s management expects “record revenue and net income” for the full-year period.

Growth Prospects

As a small-cap company, Computer Services has a much higher ceiling than many of its large-cap competitors. The company continues to make acquisitions in the highly fragmented regional bank service industry. Moreover, Computer Services is often launching new services (such as new websites, mobile banking applications, and due diligence tools) to improve their services to customers.

A few examples of the company’s recent acquisitions and new product offerings are:

These acquisitions and new products build shareholder value and increase the company’s scale-based edge over its competitors.

Competitive Advantage & Recession Performance

Computer Service’s long dividend increase history shows that the company has a durable competitive advantage. Computer Services’ trusted reputation and full-service offerings to banks increases switching costs and improves customer retention.

I would expect Computer Services to perform well in periods of economic recession for two reasons. First, the company is generally conservatively financed (more on that later), which makes it unlike many of the other companies in the financial industry. Think of Computer Services as more of a services company, not a financial company.

Secondly, the company’s small size means that its performance can more easily diverge from economic conditions. For Computer Services, the gain (or loss) of a large regional banking customer will likely have a much larger effect on its bottom line than changes in general macroeconomic conditions.

Computer Services’ historical performance indicates it exhibits the recession-resistant traits I would expect. The company grew its earnings-per-share during each year of the great recession of 2008-2009, with double-digit average earnings growth:

Computer Services also has a pristine balance sheet right now. The company has had no debt over the past two fiscal years.

CSVI Rock Solid Balance Sheet

Source: Computer Services 2016 Financial Summary

With all this in mind, I would expect the performance of Computer Services over the next economic recession to be far superior to the stock market in general.

Valuation & Expected Returns

The future total returns for Computer Services’ shareholders can be estimated by looking at the company’s valuation, dividend payments, and expected earnings growth.

Looking at valuation first, Computer Services reported diluted earnings-per-share of $2.07 for fiscal 2016. Today’s stock price of $44.50 represents a 21.5x multiple of 2016’s earnings. For context, the S&P 500 trades at a price-to-earnings ratio of 26.1x (propped up by low interest rates).

Small-cap stocks with strong growth expectations often trade at a high valuation multiple because of their potential upside, but this is not the case with Computer Services. Accordingly, I believe the company presents reasonable value at today’s prices.

The company’s most recent quarterly dividend was paid in the amount of $0.28. This quarterly payment indicates an annual rate of $1.12, which equates to a yield of 2.5%  based on today’s stock price of $44.50.

This yield is approximately 25% higher than the S&P 500’s average dividend yield of 2.0%. The company’s dividend is also very safe, as Computer Services is currently paying out only 54% of 2016’s earnings as dividend payments.

The largest contributor to shareholder returns will be the future earnings growth of Computer Services. Over the past ten years, the company has grown its earnings-per-share by 9.3% per year and its revenues by 7.9% per year.

CSVI Growth Metrics

Source: Computer Services 2016 Financial Summary

I expect the company’s earnings-per-share to increase by 6%-8% over full economic cycles.

Overall, I expect total returns of 8.5%-10.5% for Computer Services shareholders, composed of:

These estimated returns are before the effects of valuation changes.

Final Thoughts

Computer Services looks like an attractive stock right now. The company’s above-average dividend yield, strong historical earnings growth, and low payout ratio help its rankings using The 8 Rules of Dividend Investing.

It is important for investors to recognize that Computer Services is a small-cap stock. With a market capitalization of ~$607 million, the company might not offer the liquidity that other large-cap financial services companies do.

With that said, Computer Services remains a buy for investors that might not need the liquidity that comes from investing in blue-chip stocks.

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