Fool flips its view of Thomson Reuters shares

The company’s shares seem to be very popular among investors these days, particularly those seeking dividends, it said, and it is easy to see why.

“The company seems to have turned a corner with its Eikon product, the Legal division continues its strong performance, and margins have edged up.” This has all had a great impact on the company’s stock price, which has increased by 50 per cent over the past two years.

Despite the increase, TRI still has a healthy 3.5 per cent dividend yield. “So what’s not to like? Well, there are still reasons to avoid the shares…” It gave them as limited growth prospects and intense competition.

Ever since the merger between Thomson and Reuters, growth has been very difficult to come by, and the most recent quarter was no exception, with revenues up one per cent year-over-year.

“Some of the slow growth is due to secular trends. For example, the Legal division still derives significant revenue from print subscription services, which declined by 9% in the most recent quarter. The Financial and Risk division is also struggling to grow - most recently, revenue declined by 2% when factoring out currency effects.

“This has made it difficult for the company to increase its payout – since early 2011, the dividend has only gone up by 6%.”

Part of the reason for Thomson’s slow growth is increasing competition. “The most formidable is Bloomberg, which has gained market share at the expense of Thomson in recent years, with a product that is much more popular. Meanwhile, lower-cost providers like FactSet Research Systems Inc. and Capital IQ are also performing strongly.”

On the legal side, Thomson appears to have the best product. But the company’s main competitor, Reed Elsevier, has been known to give heavy discounts to steal market share, which does not help profitability for either company.

On 21 August The Motley Fool enumerated five strengths of Thomson Reuters as its foundation for continuing to offer value to its shareholders and reasons the invest.

It listed them as:

1. Customer groups.

Thomson Reuters is diversified across a broad-based customer grouping of four markets - financial and risk, legal, tax and accounting, and intellectual property and science - in which the company has leadership positions. This customer diversification is a foundational strength.

2. Revenue model.

Thomson Reuters primarily earns subscription-based revenues. Recurring revenue - 87 per cent of its portfolio - is an important strength that offers income stability for the company and its investors. Around $400 million in savings each year will finance growth programmes.

3. Growth strategy.

Thomson Reuters will target its resources to specific growth areas including tax and accounting products.

4. Financial and Risk business.

The financial business is a strong brand, which serves over 40,000 customers and 400,000 end users globally.

5. Free cash flow focus.

Along with these strengths, the company emphasises free cash flow ($1.2 billion in 2013) and its 2014 outlook for free cash flow is $1.3-1.5 billion. Cost saving initiatives should boost both earnings per share and free cash flow per share.

“Consider Thomson Reuters as a publishing industry component to your portfolio,” The Motley Fool advised. “Driven by the above-mentioned growth in its Tax and Accounting and Legal divisions, it recently reported a higher-than-expected quarterly profit.” ■