There are many great dividend stocks which are pretty well known by the mainstream dividend growth investing community. I think that you will recognize many of those which are part of my favorite dividend stocks to buy and hold for decades. However, today I would like to introduce Wolters Kluwer NV to you ($AMS:WKL | NL0000395903). Wolters Kluwer is a lessor known European Dividend Aristocrat with 31 years of dividend growth and in this article I will assess Wolter Kluwer’s dividend safety.

And dividend safety is at the core of my dividend growth investment strategy. I simply need increasing dividends to be able to retire early within the next 7 years. Dividend cuts like recently from Danone SA and Red Electrica are not helping me to achieve those goals. Luckily I did my homework by analyzing Red Electrica and therefore I wasn’t surprised with Red Electrica cutting its dividend by 5%.

Having said that, enjoy the read and let me know what you think about Wolter Kluwer’s dividend safety.

Wolters Kluwer History

Wolters Kluwer NV was founded back in 1836 by Jan Berends Wolters. He started his bookstore and publishing house in Groningen where he focused on educational publishing. The company became quickly very successful and I think that many of the Dutch readers will recognize the “Aap-Noot-Mies” lessons to learn the Dutch language. Wolters Kluwer was at the foundation of that.

The company kept on growing over the next century and it became one of Netherland’s iconic publishing houses.

But it was not alone, because its neighbor Noordhoff was a serious competitor. Though, International competition was becoming very strong in the early 60’s and that’s why Wolters and Noordhoff decided to merge in 1968 to remain competitive. The company Wolters-Noordhoff was born.

The new company name didn’t last long though. In 1983 the company merged with ICU to become Wolters-Samson and quickly after that it merged with Kluwer in 1987. Elsevier (aka RelX, another great European dividend aristocrat), wanted to take-over Kluwer, but Kluwer thought there was a much better company fit with Wolters-Samson. Hence, in 1987 the two companies merged together and this is why the company is named Wolters-Kluwer NV today.

You can imagine that those years created quite some turmoil in this industry, because it was a very strong market consolidation. At the same time these years were also very foundational to the company, because Wolters had a very strong focus on emerging electronic technologies. In 1984 the company was already pretty much considered a digital business.

Let that sink in for a bit if you still see paper trails everywhere around you in the company you work for now 😉

Fast forward to the last decade: the company is mainly known for their enormous size of high quality informational databases and software solutions. 93% of the Fortune 500 companies are using their information services for which they pay high sums of money in forms of licenses and subscriptions. Think about professional information to support clinicians, accountants, lawyers, tax and finance related professionals in their research.

What I find very impressive is that the company always stayed close to their core and at the same time kept on reinventing themselves as technology evolved. At the same time it was very proactive to protect it’s existence via mergers and acquisitions. You wouldn’t necessarily expect this from a company which is considered to operate in a relatively boring industry.

Wolters Kluwer Business Model

How Wolters Kluwer earns its money

Wolters Kluwer focuses on 4 market segments and the company has organized itself around it:

1. Health
2. Tax & Accounting
3. Governance, Risk & Compliance
4. Legal & Regulatory

The below overview shows you the revenues by division based on their full year 2020 earnings report:

What I find very interesting is that information services in the form of print still makes up 9% of their revenue. Although it must be said that they saw a steep decline of 17% last year and I think we will never see this back again. From the other side, digital information services have offset that decline, because it grew with 4% year-over-year and now makes up 81% of their revenues. The remaining 10% is made up by general services.

At a certain moment there will be nothing to decline anymore in paper. So if digital sales keeps growing with 4% per year and with a higher profit margin then this should accelerate their net income growth.

What I also like in Wolters Kluwer’s strategy is the ambition to change most of their on-premise applications into the cloud. This should generally lead to higher margins when providing their services.

Do they have a catalyst?

Definitely! And it’s actually a really obvious one: Machine Learning and Artificial Intelligence.

The data scientists among our readers will know that the algorithms require structured and clean data as much as possible to build reliable models. And this is exactly what Wolters Kluwer has to offer. Their information libraries provide a wealth of structured information, which makes the life of data scientists easier (i.e. in XML).

Customers are willing to pay for this and this is one of the main reasons why I believe that the overall market can indeed grow with an 8% CAGR.

Who are Wolters Kluwer competitors?

The company operates mainly in the Global Information Services market which is expected to grow by $50 Billion during 2021-2025 at a CAGR of 8%. This is good news, but who are the other players in this market?

Together these companies have a large market share in the Global Information Services market, but I couldn’t find an up-to-date number of this (It’s stored in paid reports). However, based on the above table we can safely say that RELX is the main competitor of WoltersKluwer.

RELX also reported their Full Year 2020 earnings and they had similar growth numbers as WoltersKluwer. This tells me that WoltersKluwer is not outpacing its main competitor based on last years numbers, while it still has a lot of opportunity to take their market share.

All-in-All I think that Wolters Kluwer has a pretty stable business model. The ever-increasing need for access to historical expert information will in my opinion still be a catalyst for several years to come. Machine Learning and Artificial Intelligence are there to stay and now it’s up to Wolters Kluwer to execute on it and take those sales in.

Wolters Kluwer Dividend Safety

Is Wolters Kluwer dividend safe? That’s the main question that I want to answer as a dividend growth investor. Let me therefore explore several determining factors first and then get back to you with my answer.

Wolters Kluwer dividend policy

One of the things that I find important when investing in dividend growing companies is to read a strong commitment about this in their dividend policy. And we have good news here, because the company wants to increase their dividend per share each year.

Dividend History

Wolters Kluwer has a very good dividend growth track record of 34 years. I have been able to track their dividend growth back all the way until it’s merger in 1987 and the only time it froze its dividend was between 2002 and 2005.

And the above chart says it all. Remember what I mentioned about their main catalyst? It’s clearly visible that the last 5 years have seen a strong acceleration in their dividends supported by strong Free Cash Flow.

To summarize this, the 10 year CAGR for dividends was 7.18% and that’s nicely above my 6% target annualized dividend growth rate.

Earnings and Cash Flow

Their Earnings and Free Cash Flow (FCF) have been covering the dividend nicely over the last 8 years. The payout ratio has been hovering around 50% for the last 5 years and the dividend grew nicely in lockstep with their Free Cash Flow

I like to see that, because it means that the company isn’t growing its dividend faster than their earnings / FCF growth. It provides a cushion for future headwinds as mentioned in their dividend policy.

Wolters Kluwer Share buybacks

The company has also been aggressively buying back its shares over the last 5 years. These rates are quite high and it includes the buyback of diluted shares due to bonus payouts.

I like about these buybacks that it already results in a 2% dividend growth without the need to increase their free cash flow. But the question is now whether it did this at the expense of their balance sheet? So let’s have a look at that:

As you can see, this is just phenomenal. There are really not that many companies that I have analyzed over the last few years that have a net positive result when doing these calculations.

But we’re not there yet, let’s look at their Debt as well.

Debt

Debt is something I always very carefully look at, because having too much debt and debt obligations can really scrutinize a company when under stress. It can also put a growing dividend at risk.

As you can see in the above table, their long term debt has been fluctuating around 2 Billion Euros, but it suddenly increased again last year. The reason for that has been the issuance of new bonds to finance future capital allocation decisions.

I’m quite OK with this, because so far the company has proven to be great capital allocators. I also know that making bold acquisitions is part of their 5-year strategy, so I’m really curious to see if some of this money will be spend on that.

The only tiny remark I could give is that their Debt to Equity ratio increased again to above 100% which is something I prefer to see at maximum 60%. It’s not a big thing in this context, but something to be aware of.

All in all I find their dividend very safe.

I judge this based on their capital allocation strategy, their dividend growth track record and their conservative approach to payout ratios and share buybacks. Besides that, their earnings and free cash flow have been accelerating over the last 5 years which is the cherry on the top for me.

Valuation

I’m really liking what I see so far: an iconic Dutch global publisher with a pretty safe dividend. But does this mean that now is also the right time to buy some shares in this company?

Let’s try to estimate their current value via a Discounted Cash Flow calculation. I like the discounted cash flow, because it is based on a company’s free cash flow and that’s a number which is the most hardest to manipulate by a board of directors.

The discounted cash flow allows you effectively to look at all incoming free cash flow in the upcoming years, but then discounted to the price of today.

Why do we discount it like that? Well, money is simply less worth in the future then it is today, because inflation and the cost of capital will make the same Euro less valuable in the future.

Having said that, I’m using for Wolters Kluwer a Discount Rate of 8% and 875 million Free Cash Flow as a baseline. This is in line with their own 2021 outlook.

The fair value based on my Dividend Discount Model is considered

€69.69

Believe me, I didn’t make this up 😂. See details of the variables I used in the picture below.

Off course, I might me wrong in my assumptions about the variables and that’s why I’m also using a margin of safety. I have chosen 10% for a business like Wolters Kluwer, because I don’t find it too hard to analyze and to understand their business.

They have predictable and stable earnings growth and an industry catalyst giving some tailwinds. Hence, the likelihood that I’m totally off is something that I consider low.

And to be clear, a 10% margin-of-safety gives me a buy price of €62.72.

At such a price you get Wolters Kluwer with a 2.17% dividend yield. This is too low for me regarding my 2.75% entry criteria that I’ve set as a minimum threshold in my dividend stock screener. At the same time the company would have a P/E multiple of 23 and a P/FCF of 18.5. I don’t consider that on the cheap side either.

Hence, this rather sounds like a great company at a decent price (at 63 Euro).

Therefore, I might nibble in a little bit around €63 just to get it in my portfolio and to start following it. But I would keep it as a very initial position while waiting for better opportunities from a dividend yield point of view.

Final thoughts about Wolters Kluwer NV

I’m very impressed with the stability of the company and they’re product offering. They seem to do everything right at the moment by leveraging the opportunity machine learning and digital transformations provided to the business information services industry.

But that’s where I’m not too happy either, because I find Wolters Kluwer trading at around fair value price. This is usually good, but I guess I’m a bit too greedy at the moment and I want to have it at a discount. Especially when they provide a relatively low yield.

Let’s see what the upcoming weeks will do. Maybe I get lucky so that I can at least initiate a position at ~€63.00.

As a bonus I’m sharing with you my one-pager of the company 👇

Quick Recap: Wolters Kluwer dividend stock analysis

Thanks for reading this far and I hope that you found this analysis insightful.

So tell me, what do you think? Would you like to own some Wolters Kluwer stock in your portfolio?

I’m eager to learn from you, so please leave your thoughts behind in the comment section below 🙏