Computershare’s Technology-Driven Growth Paves Way for Future Dividend Increases

About Computershare Limited

Computershare Limited (Computershare, the Group, ASX: CPU) was one of Melbourne’s early start-up technology companies when in 1978 it began to provide computer services to businesses seeking to automate manual processes. This soon progressed to providing specialist computer bureau services to Australian share registrars. Computershare listed on the ASX in 1994 at $1.80 with a market capitalisation of $36 million when it employed 50 staff. Today the Group employs 12,000 staff across all major financial markets in 22 countries.

Future dividend growth likely to exceed earnings growth

Computershare has all the attributes of a high margin, cash generative, technology-driven, capital light business. Its earnings growth is more reliant on intellectual assets and human capital than economic capital and physical assets, because the Group’s superior technology is the key differentiator relative to its peers.

This superior technology provides operational leverage in that Computershare isn’t reliant on increasing dilutive equity to grow shareholder earnings. Accordingly, the outcome is that earnings per share can grow faster than earnings, and dividends per share can exceed the rate of earnings growth. This explains Computershare’s 31-year history of expanding EBIT margins and the near doubling of its earnings, dividends and return on capital over the past five years. Since FY19 Management Earnings Per Share has increased by an average of 13 percent per annum, Return on Invested Capital has increased from 17 percent to 30 percent and dividend growth has outpaced earnings growth.

As a technology-enabled servicer of financial assets and payments provider, the Group performs through the economic cycle by generating recurring fees from 35 million active shareholder’s accounts and $6 trillion of debt securities. Computershare also earns ongoing fee income from administering $230 billion of Employee Share Plans.

Managing these underlying assets includes electronic processing of $2 trillion of payments annually. The significance of this service is that for the payments to be processed, client cash balances are held from which interest income and transaction revenues are earned for Computershare.

Managing these underlying assets is Computershare’s exclusive focus and core competency, which in turn ensures superior execution capability, enabling higher shareholder returns across multiple economic cycles.

Absence of franking implies ongoing share buy-backs

Most of Computershare’s income originates from foreign sources including the United States, United Kingdom, Europe, and Asia. This is why just US$6.3 million is in the franking account at 30 June 2024. To put this franking account balance in perspective, Computershare’s annual dividend is about US$310 million.

Given that unfranked dividends leave Australian resident shareholders with a tax liability, Computershare applies its high cash-backed earnings to reduce debt levels, invest in technology to drive operational efficiencies, and to undertake share buy-backs.

Share buy-backs reduce the number of shares on issue, which allows earnings per share to grow at a faster rate than earnings. Higher earnings per share support share price appreciation, assuming constant price-earnings multiples. This facilitates shareholders’ ability to dispose of shares and avail themselves of the capital gains tax concessions, which deliver a more favourable tax treatment than unfranked dividends.

Accordingly, it seems probable that on completing its current A$750 million on-market share buy-back this year, Computershare may announce a further similar sized buy-back. This assumes that there are no large acquisition targets on the short-term horizon.

As a globally integrated provider of shareholder registry services and employee equity plans, with a firmly established presence in large and growing markets, Computershare has built a high-quality business that endures. This enduring market presence should ensure steady shareholder returns in the decade ahead.