As you might deduce from reading
my work here at
, I'm a bit of a cheapskate.
For example, I don't buy new cars. I hate the idea of the
instant, $5,000 depreciation you experience the minute you drive
a new car off of the lot.
As a result, I'm more attuned to used-car valuations.
Naturally, late-model brands with a history of dependability have
higher, more stable resale values -- but the same isn't always
true for stocks.
Take tobacco giant
Altria Group (NYSE:
. Over the past five years, the company's net income has grown at
an average annual rate of around 7%. Not setting the woods on
fire, but very predictable and consistent. Shareholders have been
Not including dividends, the stock has returned an average of
47% a year over the past five years. Investors are willing to pay
up for that consistency.
Going back to my car example: I had a Subaru that I bought
used. It was a great car. I could set my watch to it. But what
amazed me is how little I paid for it -- and how little I got for
it when I sold it. It was a Japanese car, incredibly reliable...
but it couldn't generate any interest.
Enterprise software maker
CA Inc. (NYSE:
is a little like that Subaru: a great, reliable, undervalued
investment that no one really knows about.
Originally known as Computer Associates, CA provides
information technology (
) management software. The company's products include software
solutions for infrastructure management, IT security, storage
management, and application performance management.
While not as buzzworthy as other tech names like
, CA's core portfolio is absolutely vital to its customers' tech
infrastructure. As a result, this $13 billion company has seen
its net earnings grow at a steady rate of around 6% over the past
While CA's stock has averaged a 15% annual gain over the past
five years, apparently, investors are willing to pay more for
Altria's consistency. I'll take CA's Subaru-like performance any
Slow And Steady
Contract renewal rates among CA's large mainframe solutions
customers, its largest business segment, run at about 95%. That
means an amazingly predictable revenue stream.
Granted, 5 year average annual revenue growth is an
underwhelming 1%. But the flipside is average annual revenue of
around $4.5 billion that generates a little more than $1 billion
dollars in annual cash flow over the same time period. This has
helped CA reduce its overall debt from $2.6 billion five years
ago to $1.3 billion in 2013.
That's an incredibly well engineered company that has grown
earnings consistently and managed to practice that much fiscal
discipline. In time, that will pay off for shareholders.
The company's most recent quarterly earnings report surprised
consensus estimates by 5% coming in at 61 cents a share versus
the forecasted 58 cents a share. Revenue was also slightly higher
than expected coming in at $1.108 billion versus estimates of
$1.089 billion. Billings also exceeded expectations coming in at
$1.434 billion as opposed to forecasts of $1.365 billion' and
upside surprise of...wait for it...5%.
A Bondlike Stock
In previous articles, I've referenced the Warren Buffett concept
of investing in a company whose results are so steady and
predictable that its stock almost behaves like a bond. I would
much rather own a company that delivers 5% to 6% year in and year
out than a company whose results are all over the place.
CA fits this bondlike description -- but the herd has not
recognized this quality. CA trades at a low forward
price-to-earnings (P/E) ratio of 11.5.
The dividend statistics are also intriguing. CA's dividend
payout ratio is 50% (my target maximum is 60%). The dividend has
grown at an average rate of over 100% during the past five years,
jumping from $0.16 a share in 2009 to $1 presently, good for a
yield of 3.5%. That's extremely impressive, considering
enterprise software peers such as
have dividend yield of less than 2%.
The company has also been repurchasing its stock. Currently,
CA is in the middle of a $500 million buyback program.
Risks to Consider:
While CA's seemingly steady mid-single-digit growth may seem
secure, it could be indicative of a slowing segment. Many
companies are migrating from large, proprietary mainframe
software systems to cloud-based solutions. While competition is
fierce in this sector, CA is investing in cloud solutions by
acquiring Nimsoft, a cloud managed services provider, in 2010 for
$350 million in cash. Another consideration is the overall
sluggish growth of the global economy.
Action to Take -->
CA shares currently trade near $29 with a forward PE of 11.5 and
a dividend yield of 3.5%. Based on its consistent operating
history and business model and stellar dividend growth, a modest
expansion of the forward P/E to 16 would result in a 12- to
18-month price target of $40. With the substantial dividend
yield, that's a potential total return of over 40%.