Many stocks are trading either at fair value or at a discount to fair value at this time, due to the impact that the coronavirus epidemic and the Saudi-Russian oil price war have jointly had on the world economy. That said, not all stocks are fairly valued, and Dutch information and software solutions provider Wolters Kluwer (OTCPK:WTKWY) is one that is trading at a premium at this time.
Wolters Kluwer may not be a familiar name to many investors in the U.S., but it is a global firm with a market capitalization of $16.27 billion and a workforce of 19,000 employees in 40 countries worldwide. It serves clients in 180 countries across four key markets: governance, risk, and compliance (23%); health (26%); legal and regulatory (20%); and tax and accounting (31%).
That Wolters Kluwer is distinctive in its business is borne out by the awards it has won recently. On 03/03/2020, the health segment’s UpToDate decision support solution was ranked number one in the 2020 Best In KLAS Software and Services report for clinical decision support.
On 03/17/2020, it was announced that the compliance segment’s Vanceo Mortgage automated loan processing system had won MReport’s Top 25 Fintech Innovators 2020 Award, and HousingWire’s eighth annual HW Tech 100 Mortgage Awards. And on 03/18/2020, the enterprise legal management segment won two Stevie Awards for customer service. A more substantive mark of Wolters Kluwer’s success can be found in the revenue and net income figures that the firm has reported over the past five years.
|Year||Revenue (€)||Revenue ($)||Net Income (€)||Net Income ($)|
|2015||4.21 billion||4.50 billion||423 million||452.41 million|
|2016||4.29 billion||4.59 billion||489 million||523 million|
|2017||4.37 billion||4.67 billion||636 million||680.23 million|
|2018||4.26 billion||4.58 billion||682 million||733.23 million|
|2019||4.61 billion||4.96 billion||790 million||849.34 million|
Figures collated from annual reports available on Wolters Kluwers’ investor relations page.
This profitability, further underlined by the 19.82% operating margin, has also benefited Wolters Kluwer’s long-term shareholders. In addition to the 28.79% return on equity, Wolters Kluwer has rewarded shareholders with increasing and steady dividends for more than thirty years, and from 2006 onwards has embraced a progressive dividend policy.
Wolters Kluwer has rewarded shareholders with dividends that have been consecutively raised since 2006 and paid semi-annually since 2015. Image provided by Wolters Kluwer.
Wolters Kluwer should be able to sustain its progressive dividend policy going forward, in light of its payout ratio of 23.55% and reported free cash flow of €807 million ($867.61 million). The balance sheet also seems strong enough to sustain the dividend and cope with the current economic situation, as the long-term debt of €2.11 billion ($2.26 billion) is offset by a net worth of €2.38 billion ($2.55 billion) and total current liabilities of €3.81 billion ($4.81 billion) are offset by total current assets of €2.48 billion ($2.65 billion), cash-on-hand worth €899 million ($961.93 million), and total accounts receivable of €1.29 billion ($1.38 billion).
Looking ahead, Wolters Kluwer should benefit from growth in areas such as children’s books and the treasury and risk management software sector, which are set to grow around 5% by 2025. The firm should also benefit from partnerships such as the one, announced in February, that its health segment has forged with analytics leader SAS to provide data quality solutions for its real-world evidence analytics, as the real-world evidence market is set to grow to $1.64 billion by 2024. However, the forecast earnings-per-share growth for Wolters Kluwer over the next five years is only 8.10%, which necessitates a discount to fair value that simply is not on offer – even in this market.
At the close of market on 03/20/2020, Wolters Kluwers’ sponsored ADR traded at a share price of $59.62 with a price-to-earnings ratio of 22.11, and sporting a 1.92% dividend yield. While the current P/E is lower than the five-year average P/E of 23.00, the current dividend yield is lower than the five-year average dividend yield of 2.07%. This mixed picture makes it necessary to determine what fair value for Wolters Kluwers is.
To determine a fair value, I will first divide the current P/E by the historical market average of 15 to get a valuation ratio of 1.47 (22.11/15 = 1.47) and divide the current share price by this valuation ratio to get a first estimate for the fair value of $40.56 (59.62 / 1.47 = 40.56). Then, I will divide the current P/E by the five-year average P/E to get a valuation ratio of 0.96 (22.11 / 23.00 = 0.96) and divide the current share price by this valuation ratio to get a second estimate for the fair value of $62.10 (59.62 / 0.96 = 62.10).
Next, I will divide the five-year average dividend yield by the current dividend yield to get a valuation ratio of 1.08 (2.07 / 1.92 = 1.08) and divide the current share price by this valuation ratio to get a third estimate for fair value of $55.20 (59.62 / 1.08 = 55.20). Finally, I will average out these three estimates to get a final estimate for fair value of $52.62 (40.56 + 62.10 + 55.20 / 3 = 52.62). On the basis of this estimate, the stock is overvalued by 12%.
Wolters Kluwer is a decent information and software solutions firm with a significant global scale and a decent financial position which should continue to reward current shareholders with its progressive dividend policy. The growth prospects do not, however, warrant a 12% premium, and consequently, Wolters Kluwer is a hold, but not a buy.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.