We live in a digital world, where most of the work happens online. Offices have become paperless. There is no need for those heavy file racks to store information. It’s not just information, but operations are now going global, and the scale has made paper and even spreadsheets ineffectual in some cases. All companies, big and small, are realizing the importance of digitization. They are relying on software for their mundane tasks, making the software the digital age utility.
Unlike energy, telecommunication, and electricity, digital-age utility stocks don’t pay attractive dividends. But they offer capital appreciation, as they use their recurring revenue to acquire new companies and expand their offerings. Here are three such digital-age utility stocks that you can buy and hold forever. They could be a good place to start your investing journey.
Constellation Software
Constellation Software (TSX: CSU) was founded in 1995 by former venture capitalist Mark Leonard. It is a venture capital firm of niche vertical market software (VMS) companies with annual revenue between $5 million and $100 million. Unlike horizontal software firms like Microsoft Office that are more generic, VMS companies are more specific and cater to niche verticals. That is what makes VMS sticky, and they enjoy recurring cash flow as the cost of switching to another provider is high. Moreover, there aren’t many competitors in niche markets.
Constellation Software acquires entities using standalone financing that doesn’t bring the debt to the parent company. It lets the acquired entities run independently and provide any assistance they seek to boost revenue. While this mitigates the integration risk, it also reduces merger synergies.
But you can’t deny the resilient nature of the business model, as that has helped Constellation increase its revenue and EPS at a compound annual growth rate (CAGR) of over 13% and 16%, respectively, in 2016-2020 period. The stock has surged over 3,770% since 2010 and is still growing at a steady rate surpassing all types of crises.
Open Text
Open Text (TSX: OTEX)(NASDAQ: OTEX) is an Enterprise Information Management solution. The solution makes it easy to move and manage critical documents and information securely within and outside the organization. Documents are stored and archived systematically, making it is easier to access the information you seek as long as you have security access.
The nature of Open Text’s operations is so sticky that companies sign long-term contracts and are reluctant to switch. It is now moving its licensing software to the cloud. This will help clients access information anywhere from any device with a secure internet connection.
Open Text enjoys recurring revenue and higher profit margins of over 35%. Its diverse customer base across different verticals and geographies makes it resilient to macroeconomic conditions. The pandemic has opened a new opportunity for Open Text, as companies that were earlier reluctant to digitize have come to accept the digital trend. Its March quarter revenue and EPS surged 2.2% and 23%, respectively. The stock has surged 432% since 2010 and has a 1.54% dividend yield.
CGI Group
CGI Group (TSX: GIB.A)(NYSE: GIB) is in the information technology (IT) and business process services. It helps companies of all types, from financial services to retail to healthcare, go digital. The System Integration and Consulting segment helps companies set up a digital roadmap, implement it, and improve it. The Managed IT and Business Process segment helps the companies maintain their digital solutions.
Like Open Text, CGI also enjoys long-term contracts that help it earn recurring revenue. CGI’s revenue and adjusted EBIT surged at a CAGR of 2.7% and 3.6%, respectively, in the 2016-2020 period. The stock has surged over 700% since 2010 and pays no dividend.
