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IPH Limited (IPH),

Company snapshot

Recent price: $4.77 (as at 15/06/2017)

Market cap: $920 million

Cash/debt: $32 million / $0 million

P/E ratio: 18.1 (trailing 12 months)

Dividend yield: 4.5% Partially franked (trailing 12 months)

Why Buy?

• High recurring cash flows
• Rock solid balance sheet
• Attractive growth potential

IPH Limited, ASX:IPH, is a legal firm specialising in Intellectual Property (IP). Specifically, it helps its clients pursue patent and trademark protections, and then helps monitor, enforce and renew those protections. Although IPH is a newcomer to the ASX, having listed only in late 2014, it has a long and successful history, with the origins of the business dating back to 1887 when the original "Hepburn & Spruson" partnership was formed.

Lots To Like

Unlike many services based firms, IPH enjoys a good deal of recurring sales. The business earns money throughout the entire patent and trademark process, which is a lengthy one — for example, it takes anywhere between two and five years just for a patent to be granted. Moreover, after that point the management and enforcement of IP protections provides for an attractive annuity-like revenue stream.

The business is not overly exposed to any one client either, with over 3,000 active clients spread across a range of industries. The largest client accounts for less than 3% of sales.

IPH is also a great fit for those looking for offshore exposure. Clients are typically Fortune Global 500 companies and other significant multinationals that are seeking expansion into the Asia pacific region. 70% of revenue is sourced internationally, with the majority of invoices being billed in US dollars.

The company is also well placed to make bolt-on acquisitions, given it has a large pile of cash, untapped debt facilities and zero debt. Moreover, acquired businesses can leverage off existing assets and resources, thereby becoming more efficient as part of a larger group.

Dividends A'hoy!

As a relative newcomer to the ASX, we don't have a lot of dividend history to draw on — though what we do have is encouraging.

At the current price, shares are yielding a very decent 4.5%, which is a good deal higher than the current market average and particularly attractive in the current low interest rate world. Due to its offshore earnings, IPH doesn't always offer full franking, but distributions to date have averaged a franking rate of 70%. Grossing the yield up at this level improves the yield to a juicy 5.8%.

And, because IPH has a very low capital requirement (that is, it doesn't need to retain much cash to operate and grow the business), shareholders can expect a majority of profit to paid out each year. Couple that with the expectation for above average earnings growth, and we think the long term income potential looks especially attractive.

Risks And When We'd Sell

Acquisitions can be a great way to juice earnings, but shareholders don't always benefit if the company overpays, or buys a dud. Also, given these are 'people businesses', there's the risk that key people may leave and take valuable clients with them. It's an area to watch.

With most work billed is US dollars, we must also be mindful of exchange rates. Should the Aussie dollar see a material and sustained strengthening, that would dampen growth.

Finally, though not a risk per se, we are mindful that shares are — to a certain extent — priced for growth. If per-share earnings grow at a lower than expected rate, a market revaluation could give the share price a knock.

The Foolish Bottom Line

IPH is a well established business with a clear and proven strategy, as well as a long runway of growth. And, because the business requires little capital to sustain operations, a high proportion of earnings are able to be distributed to shareholders in the form of lovely cash dividends.

With a favourable industry tailwind, leading market position and super-strong balance sheet, we think it could be the perfect addition to any income focused portfolio.

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