Over the last four quarters, TRI’s dividend has consumed 54% of its earnings and 70% of its free cash flow. As seen below, the company’s free cash flow payout ratio has increased over the last decade from about 40% in 2005 to 60-70% more recently. Given the steadiness of TRI’s cash flow, we aren’t overly concerned by its payout ratio.
Source: Simply Safe Dividends
Looking at a company’s performance during the financial crisis can also be helpful when evaluating the safety of its dividend payment. If earnings are highly cyclical, the company has greater risk of needing to freeze or cut its dividend if conditions unexpectedly turn south.
TRI’s reported results are skewed higher because of its acquisition of Reuters, which closed in April 2008. Adjusting for the acquisition and currency headwinds, TRI’s sales rose in 2008 and edged down by just 1% in 2009 despite meaningful weakness across many of its financial services customers. The company’s stock also outperformed the S&P 500 by 12% in 2008.
Because a high proportion of TRI’s revenues are recurring, its revenue patterns are generally more stable compared to other business models that primarily involve one-time product sales. TRI’s sales are typically slower to decline when conditions worsen, but they are also slower to return to growth when the economy improves. We like these types of stable business models.
Source: Simply Safe Dividends
To go along with its stable sales growth patterns, TRI has maintained an attractive margin profile over the last decade. Steady sales and high margins are often the sign of an economic moat. As we previously mentioned, TRI has a relatively fixed cost base. With plenty of recurring revenue, an ability to push through modest price increases, and a gradually expanding platform of products, TRI is consistently very profitable.
Source: Simply Safe Dividends
Turning to the balance sheet, TRI’s stable business model allows it to maintain more debt than most companies. The company has over $10 of book debt for every dollar of cash, but its entire debt balance could be retired with cash on hand and three years of earnings before interest and taxes (EBIT).
Source: Simply Safe Dividends
TRI’s average debt maturity is also 9 years, which provides plenty of flexibility for the company to meet its obligations.
Source: Thomson Reuters Investor Presentation
All things considered, we believe TRI’s dividend payment is quite safe. However, we wouldn’t mind seeing the company’s debt balance reduced a bit – you just never know what could happen, and we sleep better at night with more financial flexibilty.
