Dick Grasso, the former CEO and chairman of the New York Stock Exchange, called Broadridge “the most important firm on Wall Street that you’ve never heard of.” Sometimes, the most boring, under-the-radar businesses prove to be the best long-term investments. We think BR could be one of them.
BR serves banks, brokerage firms, mutual funds, clearing firms, bond issuers, hedge funds, and financial advisors by handling many of their administrative but mission-critical tasks such as shareholder record keeping, investor communications, billing, tax reporting, clearing and settling trades, and more. The company has been in business for more than 50 years, but it operated as a division of ADP (another Top 20 Dividend Stock – see the analysis here) until spinning out as an independent company in 2007.
BR operates in two segments. Investor Communication Solutions accounts for 75% of total sales and 76% of operating profits. The majority of this segment processes and distributes proxy materials to investors in equity securities and mutual funds and helps with vote processing. Many public companies have thousands or even millions of shareholders, but the company does not know who they all are because that data is held across many different brokers. It would be impractical for companies to work with all of the brokers through which their shares are held beneficially, so they turn to BR to ensure that proxy materials are distributed to all beneficial owners and that their votes are accurately reported. The SEC requires public companies to reimburse brokers for the expense of distributing stockholder communications to beneficial owners, so BR bills the public company for its proxy services using fees established by the NYSE, takes its cut, and submits to the broker its portion of the fees.
BR dominates this market, processing over 80% of the outstanding shares in the U.S. last year (up from 70% in 2007). The company also processed over two billion investor communications through either paper or electronic channels and offers dozens of other services – prospectus fulfilment services; electronic delivery solutions for documents including trade confirmations, tax documents, and account statements; marketing communications; tax services; and much more.
The Global Technology and Operations segment accounts for the remaining 25% of BR’s sales and provides systems that support real-time processing of securities transactions. Its services automate the transaction lifecycle of trading operations, from order capture and execution through trade confirmation, settlement, custody, and accounting. Essentially, BR allows brokers to avoid building out costly infrastructure to support the basic back-end processes of electronic trading.
In 2014, BR processed over $5 trillion in equity and fixed income trades per day of U.S. and Canadian securities, including 60% of U.S. fixed income trades and providing services to 16 of the 22 primary dealers of fixed income securities in the U.S.
Across both of its segments, BR has made numerous bolt-on acquisitions over the years to expand its suite of services into adjacent markets. While most investors associate BR with proxy services and securities processing, the company has over 150 additional products that are increasingly driving incremental growth. Altogether, about 90% of BR’s total revenue is recurring, and the company regularly achieves a client revenue retention rate in excess of 97%. From a geographical perspective, over 80% of BR’s income is generated in the United States.
With 90% of its sales recurring and a client retention rate of 98% (100% of BR’s associates have a bonus tied to customer satisfaction), BR has one of the sturdiest business models you can find. Serving the financial services area comes with some extra regulatory risk, but the benefits the industry offers have far outweighed them so far.