|
Published: April 12, 2010
Israel, believe it or not, is a blossoming emerging
market. That's because the country has an obsession with
technology. You could argue that Israel is more focused on
technology than any other emerging market in the world.
On a per capita basis, the country has the highest number of
scientists and technicians, the highest percentage of home
computers and the among the highest technology research and
development spending in the world. Microsoft (Nasdaq: MSFT)
and Cisco (Nasdaq: CSCO) have both built their only R&D
facilities outside the United States, in Israel.
While technological innovation has grown strong roots in this
corner of the world, the Israeli market is also spawning a new
breed of technology stocks with the nirvana combination of high
growth and high dividends. Income investors can have their cake
and eat it too.
Formula Systems (1985) Ltd. (Nasdaq: FORTY) is a prime
example. The Israel-based global information technology (IT)
company has been resilient through the soft global economy
because it offers software and technology that lower costs and
make businesses more efficient.
The company serves customers in more than 50 countries and
operates through three main subsidiaries: Magic Software (Nasdaq:
NGIC) has more than 25 years of experience developing and
selling software for businesses, Matrix provides IT solutions
and services to companies throughout Israel, and Sapiens
International (Nasdaq: SPNS) provides IT and software that
reduces complexity and extends the life of older computer
systems.
Formula has been able to consistently grow revenue by expanding
its customer base all over the world and always looking for
accretive acquisitions. The most recent acquisition was TACT
Computers and Systems, a company founded by a group of Israeli
Air Force and intelligence officers providing specialized
software for the aircraft and automotive industries.
Formula has seen its revenue climb +78% from 2004 through 2008.
Even in the global recession of 2009, revenue was roughly in
line with 2008, falling only about -7%, to $469 million. Most of
that decline was attributable to
currency fluctuation as the shekel devalued against the
dollar. However, aggressive cost cutting measures have made the
company leaner and meaner, and net income attributable to
shareholders soared +61% from 2008 to $19.1 million.
The market weighed in on all of this with a thumbs-up. The
+114%-plus surge the stock has posted in the past year blows
away most of its peers, as the tech-laden NASDAQ is only up
about +24% during the same period. Despite the surge, shares
still sell at less than 12 times 2009 earnings.
The company has a great
balance sheet and is in a strong position to expand. As of
Dec. 31 last year, total debt ($69 million) was less than a
quarter of shareholder equity ($295 million), and the company
had a whopping $100 million in cash.
The best part about Formula's stock is the fat dividend. The
company pays dividends once a year, but it makes it count. The
2010 dividend, paid May 4th, was $1.47, which translates to
about 12.5% at current prices.
Dividend payments vary because the company has a policy of
paying out sums "not planned to be used for investments in the
near future." However, even with no dividend in 2007, the
average annual payment has averaged $1.65 during the last six
years. Also important to remember: Israel has a 25% withholding
tax on dividends, which can be offset against other taxes and
retrieved when you file taxes in the United States. Dividend
payments are converted to U.S. dollars from Israeli Shekels, so
there is some currency risk involved.
Going forward, the company said it will continue to focus on
cost cuts as well as mergers and acquisitions in 2010. Formula's
money saving technologies have made it resilient during the
recession, but an improving economy is even better for earnings
as companies invest more in technology infrastructure.
-- Tom Hutchinson
Staff Writer
StreetAuthority |
