Shares in Canadian-based technology firm Constellation Software Inc. (TSX:CSU) are up more than 27% so far in 2019. But what’s even more impressive is that the company’s share price has risen by more than 7526% since the beginning of 2006. That works out to a compounded return of greater than 39% annually over the course of a thirteen-year period. Not the type of idea you’d likely want to ignore when making plans for your retirement. But what’s interesting about this company (besides the outstanding returns of course) is its chosen business model. Essentially, what the company does is seek…
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Shares in Canadian-based technology firm Constellation Software Inc. (TSX:CSU) are up more than 27% so far in 2019.
But what’s even more impressive is that the company’s share price has risen by more than 7526% since the beginning of 2006.
That works out to a compounded return of greater than 39% annually over the course of a thirteen-year period.
Not the type of idea you’d likely want to ignore when making plans for your retirement.
But what’s interesting about this company (besides the outstanding returns of course) is its chosen business model.
Essentially, what the company does is seek to acquire, manage and build market-leading software and services to industries throughout the public and private sectors.
Led by an experienced team of managers, Constellation works closely with the companies that it acquires to implement effective systems for management and financial controls while helping them to expand to new markets and broaden their product portfolios.
The proof is in the pudding
In 2018 Constellation Software directed over $600 million towards acquisitions, which helped to drive top-line revenue growth of 23% and bottom-line net income growth of 71% from $222 million a year ago to $379 million for the most recently closed fiscal year ended December 31.
As a reward for the company’s shareholders in announcing the company’s strong year-end results, Constellation’s board of directors also announced the issuance of a one-time special dividend of $20.00 per share, payable on April 5, 2019 to shareholders of record at the close of business on March 16.
That special dividend is in addition the firm’s regular quarterly payout of $1.00 per share.
In announcing the move, management said that while the company is confident that the money it directed towards M&A activity in 2018 will earn an attractive rate of return over the lifetime of those investments, it felt that heading into 2019, it was holding capital that was in excess of its needs which justified the decision to return some of that capital to the firm’s shareholders.
Successfully avoiding the temptation of management excesses
I’m really encouraged by what management at this firm has been able to accomplish over such a relatively short period, particularly in light of the fact that it has been able to acquire such a broad portfolio of companies while at the same time avoiding the risk of developing a bloated and unsustainable capital structure.
That’s because as of December 31, Constellation held only a minimal amount of outstanding debt on its balance sheet compared to $866 million of shareholder’s equity.
That’s a difficult feat to accomplish when you’re in the business of paying to acquire other valuable and successful companies and should be viewed as nothing other than very encouraging for the company’s current and prospective shareholders.
Buy now or buy later?
The reality as I see it? If you already own some Constellation Software stock – great, good on you.
But if you don’t happen to own any CSU stock just yet, but are perhaps looking to initiate a position in the company, you may be able to get in at least at a slightly better price than where the shares are trading today.
The reason being is that consistent with the plan to issue a one-time special dividend, fewer acquisition opportunities for the company in 2019 may lead to slower growth compared to what its shareholders have become accustomed to.
If management doesn’t see the potential for many profitable acquisition targets in 2019, then they’re absolutely doing the right thing in holding off on pursuing additional M&A activity.
A decision, mind you, which should be viewed as an encouraging sign in that management’s interests are aligned with the interests of the company’s long-term shareholders.
However, we also know how fickle markets can be in misinterpreting short-term signals as being inductive of longer-term trends, even when they are not.
That said, it wouldn’t exactly surprise me to see the CSU shares at some point this year trading at lower levels than they are currently, which could make for a very interesting investment opportunity if and when the time comes.
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Fool contributor Jason Phillips has no position in any of the stocks mentioned. The Motley Fool owns shares of Berkshire Hathaway (B shares).