Dividend Analysis - Thomson Corporation (TSE:TOC)
14 November 2007Dividends Matter reader Telly has patiently been waiting on an analysis of Thomson Corporation. It trades on both the TSE and the NYSE under the symbol TOC. With its recent purchase of Reuters Group PLC, a new corporation is formed. This reduces the historical value of the data as moving forward, this new company could operate completely different. So that is one reason why I have hesitated on analyzing this stock.
But for Telly’s sake, let’s have a look and see if this stock deserves a spot in our portfolio of superior dividend yielding stocks.
I will work with the Canadian data as I know that Telly is Canadian.
Company Profile:
From Yahoo Finance
The Thomson Corporation and its subsidiaries provide information services to business and professional customers worldwide. The company operates through five segments: Thomson Legal, Thomson Tax and Accounting, Thomson Financial, Thomson Scientific, and Thomson Healthcare.
Market capitalization is $26.47B. For a more complete profile, follow the link to Yahoo Finance.
Company Fundamentals:
First of all, let’s look at the fundamentals and see if this is a company worth holding for the next 10 years.
Management has consistently delivered a very steady return on invested capital in the 6.5% range each and every year. The 5 year average ROIC is 6.6%. Consistency is great as it gives us confidence that management will be able to continue to deliver this ROIC.
The return on equity has been increasing over the last 10 years. The 10 year average ROE is 7.87%. The 5 year average is slightly higher at 8.07%. Not earth shattering numbers, but consistent over the 10 year period.
Equity growth rates have been consistently in the single digits since 2001 in roughly the 6% range. In fact, the 9 year rate is 7.65%. The 5 year rate drops to 5.55%. The 3 year rate dips to 4.82%. And last year’s equity growth rate climbs back up to 6.66%.
Earnings per share growth rate has been more erratic. Four separate years experienced negative growth rates while 2 separate years experienced rates of 37% and 50% respectively. Over the 10 year period, the EPS growth rate was 6.77%. The 5 year rate increases to 9.74%. The 3 year rate drops to 3.78%. And last year’s EPS growth rate was an outstanding 37.25%. Lots of volatility in these growth rates.
Sales growth rates have been anemic at best. The 9 year rate is 1.25%. The 5 year rate is -0.06%. Last year’s rate was a dismal -23.69%.
Fundamentally, there isn’t much to write home about. I am not overly excited at the moment about this one.
Dividend Fundamentals:
The current dividend yield is 2.52%. That is just slightly better than the S&P/TSX Composite Index dividend yield of 2.43%. So this would be an average yield in today’s market.
The dividend growth rate has historically been on the low side. As you can see, the 9 year rate is 3.75%. The 5 year rate creeps up to 4.46%. Last year’s rate was an out of character 11.39%. Now, I did remove the special one time dividend in 2003 as that was part of the Bell sale. Last year’s dividend increase aside, these are very disappointing growth rates.
And I can see why they have kept the increases low. The dividend payout ratio is quite high and has been very volatile. In 2006, it sat at 62.86%. But it seems to have hit as high as 99%!
Cash flow growth rates have been almost non existent. The 9 year rate is a mere 0.76%. The 5 year rate jumps to 2.51%. But then quickly comes back to zero with the 3 year rate at -0.82% and last year’s rate at 0.49%.
Valuation Models:
Let’s use our 3 models to determine a fair value for this stock.
For the average high dividend yield model price, I look at the last 10 years worth of dividend yield data. Interestingly, the 10 year average high dividend yield is 1.99% and the 5 year average high dividend yield is 2.02%. That is pretty consistent. At a current dividend yield of 2.52%, this stock would appear to be on sale. The model price works out to $51.67. At the current price of $41.30, a discount of 20.06% current exists!
Mr. Benjamin Graham would not agree. The Graham number works out to $24.96 or a premium of 65.46%. Even using my Modified Graham number of $28.82, a very large premium exists.
Let’s see what the present value model price works out to. I used the following inputs:
- future EPS growth rate of 5.55% (I determined this value by looking at the historical equity growth rates. Analysts have forecast a whopping 15% which I just can’t justify using. So my model price will come out on the conservative side.)
- future P/E of 11.1 (This P/E is calculated by doubling the future EPS growth rate. It is well below the current P/E of 24.15 and well, well below the historical P/E.)
- dividend yield of 2.02%
- future dividend growth rate of 4.46%
With these inputs, the model price works out to a mere $10.01. Of course, that has to do with the low future EPS growth rate I have chosen. And because of that low growth rate, there is no way any investor would put a large P/E on the stock. These 2 numbers go hand in hand. You will have to determine what you feel is an adequate future EPS growth rate.
Here is my dividend analysis of TOC.
Here is the 1 year stock price chart:
Not a great year for TOC.
Conclusion:
So, would I add this stock to our portfolio of superior dividend yielding stocks? No.
First of all, there is a lot of uncertainty with the recent purchase of Reuters.
Secondly, I can’t justify the analysts forecast of a future EPS growth rate of 15% when TOC has consistently delivered equity growth rates in the 6% range.
Too much uncertainty. I am looking for certainty with my dividend payers. I’ll just look elsewhere for my yield. I hope you found the analysis useful Telly and hopefully your own analysis showed similar results.
Full Disclosure: I do not own shares in TOC.
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on November 14th, 2007 at 10:17 am
Thanks AJ! I think this analysis is a very good example for why, as a dividend investor, you can not rely on average high dividend yield as your only method for determining fair value!
Thanks again!
on November 14th, 2007 at 11:28 am
Dividend is one important factor ro minority shareholder to invest among the other thing even not compulsory obligation company to its members.
Reuters and Thomson merger could noy be analysed using conventional method due to lack of transparency and alot of questionable matters such as how Thomsom to conducting due diligent in just one week.
Why Reuters Founder Share company waived its duty to this matter regarding threshold 15 % stake in reuters.
All the matters of course simply to understandable there are alot corporate governance issues those are non public information.
Integrity and credibility of regulator to make in depth secrutiny prior to approve the merger.
on November 14th, 2007 at 2:10 pm
This was one I was looking to analyze myself. So thank you for beating me to it.
I would be cautious due to the big differnce from valuation models. There is absolutely no consensus between any of the valuations.
on November 14th, 2007 at 9:00 pm
As always, great analysis!
Best Wishes,
D4L