September Monthly Stock Purchase – Fidessa DMGT Advantages Of Technology Stocks 1

Technology has been the driving force behind the progress made in he 21st century. So in this regard, it is really strange that the London market has barely any world leading technology companies listed on it. And the few that are listed, they are normally undervalued compared to peers worldwide – just look a ARM and Aveva for examples of this and they have duly undergone a takeover and a merger. Fidessa is one of the only truly global technology companies we have left on our main UK market and I believe its valuation at 20x earnings is cheap for a company of its quality. If Fidessa was trading on a different exchange, like the NYSE, I would be willing to hazard a guess that it would be trading at close to 30x earnings. Higher valuations for sectors on one exchange (market) compared to another is one of the reasons companies based locally are listed abroad – the selling shareholders want to extract as much value as possible. But this is a story for a different.

Looking at technology companies as a whole, they have one huge advantage over companies in other sectors; low capital expenditures. Once any initial investment is made and the company starts turning a profit, shareholders can expect to reap the rewards for years to come. The asset-light business model ensures that any Free Cash Flow the company generates goes directly to shareholders in the form of higher dividend payments and greater stock buybacks as opposed to the money being sucked up by the need to re-invest huge amounts of money into the business. And example of this can be seen by Fidessa below.

In this regard, the two purchases I made dying my September monthly stock purchase programme were:

  • Fidessa (FDSA) – Bought 10 shares at 2,071p each. Dividend income = £9.35
  • Daily Mail Group Trust (DMGT) – Bought 26 shares at 6.14 each. Dividend income = £5.72

Fidessa is a FTSE 250 company that provides software to fund management companies and other investor. Fidessa’s business model is one I like – it sells its products to other businesses (rather than to consumers) and it operates in a specialist niche market with high barriers to entry. This combination of characteristics ensures that Fidessa has pricing power meaning it will continue to produce high levels of Free Cash Flows in the years to come.

Looking at Fidessa’s share price , it has stayed stagnant over the past few years trading in the £20 to £26 range. This implies that the company has not been making the operational progress to warrant a higher stock price. But this level of thinking is too basic. Dig deeper and look at the companies accounts and you will find that the company is in far better shape than it was a few years ago and it is making much more money. The company has built a dominate global position for its equity platform and the company is now building out a derivatives platform. It is true that earnings for 2016 would have been (I estimate) approximately 40% higher than they actually were if Fidessa had passed on this organic investment opportunity. But as a long-term shareholder, I very much support this project. And despite the burden on current results, Fidessa still generated good free cash flow growth thanks to healthy growth in its existing business. So in short, the company is definitely becoming stronger. The stagnation of its share price is simply due to the company re-rating to a lower multiple which is great for me as it has given me the chance to invest in an excellent business at a reasonable price.

Oh, did I mention that Fidessa has no net debt on its balance sheet! Investors are not paying much attention to this at present due to the ‘easy money’ times we live in. But just wait till a recession or cash-crunch hits, this bullet-proof balance sheet will ensure Fidessa comes out at the other end stronger.

It is also worth mentioning Fidessa is currently yielding close to 5%. On any financial research site / stock screener, it will list Fidessa’s dividend being 43.5 implying a 2.1% yield. But as mentioned before, due to the nature of the business Fidessa is in, it can afford to pour all its Free Cash Flow to shareholders and this is what it is doing by paying a special dividend. The company increased both its ordinary and regular special dividend by +11% showing the robustness of its business. In total dividends, both ordinary and special, paid over the last year add up to 93.5p which makes the yield on purchase 4.5%.

Another tech company I have invested in this month has been DMGT. Although classed as a media company, I think it is more of a tech company simply due to the portfolio of holdings the company possess under its corporate umbrella and the increased migration of people from the paper version of Daily Mail to the online version. I have already written about DMGT in detail before so I won’t go on about it here. All I have to say is that like Fidessa, it produces high amounts of Free cash Flow which is being showers on to shareholders. Furthermore, its portfolio of holdings in companies like ZPG and Euromoney Institutional Investor is being greatly under appreciated by the market and I expect shares to eventually re-rate higher!

These two purchases have pushed my annual dividend income close to the £1,700 mark. This is really exciting. The goal is to hit £2,000 in dividend income by year end provided the right opportunities present itself. My portfolio is still heavily weighted to cash with my cash holdings making up about 30% of net assets. The cash position ensures that should any correction in markets occur, I will be able to pounce and buy ownership stakes in great companies for cheap!