FACTSET: asset-light cash machine

FactSet Research Systems, an institutional provider of financial data and software, closed out its 39th year of operations in Fiscal 2017. As per their website, this marked the companies 37th consecutive year of revenue growth and its 21st consecutive year of earnings growth. As predominantly a software business, FactSet is asset-light and consistently generates a 30%+ return on invested capital (ROIC). It is also an excellent dividend payer and has grown its dividend ($2.12/sh in 2017) at a CAGR of 15% per year since 2008, when its annual dividend was $0.60/sh.

FactSet has been able to grow it’s dividend over time due to the significant cash it generates from it’s asset-light operations. Per the above graph, since 2008, FactSet has increased its annual operating cash flow by 131% to now ~$330M per year. Over time, FactSet has enjoyed an approximate 10:1 OCF to capital ratio, which allows the company to generate large, consistent, and growing free cash.

Holding FactSet in a diversified portfolio is not without risk, however. In our view, the two major risks we see for FactSet in today’s investment landscape are:

  1. the trend towards robo-advisors, as there is likely to be less demand by active managers for comprehensive, institutional level financial data and analysis and
  2. FactSet’s high valuation, currently in the mid-20x next years earnings, largely due to the quality of the business and general market trading multiples.

In regards to valuation, it is worth noting here that while LongTrend does pay attention to trading multiples, valuation is not generally the key driver of our investment decision. LongTrend would rather use dollar-cost averaging to gain exposure to high quality stocks over time, as two things are quite apparent to us:

  1. timing the market is a fool’s errand and
  2. like most other things in life, you get what you pay for!