The Computershare Limited (ASX: CPU) share price is down 5.3% so far in 2019, which makes it a buy (in my opinion).
Background on Computershare
Computershare provides share transfer and share registration services for companies in addition to employee share plans, shareholder communication and various other financial and governance services. The company operates in Asia, Australia, New Zealand, Canada, Europe, United Kingdom, Channel Islands, Ireland, Africa and the United States.
Why I think it's a buy
Computershare trades on a price-to-earnings (P/E) ratio of 22.01x versus the ASX 200, which trades on a P/E ratio of 17.97x. While this may seem expensive initially, its valuation can soon be justified when considering the growth of this company.
Computershare has achieved a return on equity (ROE) above 20% for more than 10 years. This has seen book value, and dividends, grow significantly over that period. Between 2009 and 2018 dividends paid by the company more than doubled. The company currently has a grossed-up dividend yield of 4.0% – a solid return at current interest rates. This dividend is likely to increase as the company continues its growth. The group has a pay-out ratio of 74%, which suggests that its management are happy to return earnings to shareholders.
At the Computershare investor day presentation in May, its management confirmed that they expected earnings for the 2019 financial year to grow around 12.5%. This means that Computershare is set to continue growing profits.
When considering its chosen markets, Computershare appears to have significant room for further growth. Overall, the company has identified that it earns only 50% of the available revenue in these markets. Additionally, the group are constantly seeking cost efficiencies to improve profits.
Computershare also boasts strong margins. Margins for the first half of the 2019 financial year were 21%, which was boosted by interest rates earned on client balances held by Computershare for payment to investors – a profitable endeavour.
Computershare does have a significant amount of debt, with a debt-to-equity ratio of 113.3%. However, when considering the company's margins and the profitability it gains from expanding its business, it can be considered as helpful to the business. Additionally, a significant amount of Computershare's revenue is recurring, meaning that it can predictably service its debt.
Foolish takeaway
Computershare has a high ROE and growing earnings. It pays healthy dividends and has plenty of room for continued growth. I think it's a buy.
