Why Thomson Reuters Stock Is up Over 40% in 2021

Here’s why it will be difficult for Thomson Reuters to replicate its year-to-date gains in the next year.

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Despite the pullback yesterday, the stock markets have gained significant momentum in 2021. The TSX has gained 20.8% year to date on the back of an economic recovery, quantitative easing programs, and reopening of businesses. One TSX giant that has outpaced the index is Thomson Reuters (TSX:TRI)(NYSE:TRI), which has returned over 40% to investors this year. Let’s see what drove the stock to its record highs.

Stellar quarterly results for Thomson Reuters

A company valued at a market cap of $57 billion, Thomson Reuters provides business information services all around the world. It has five primary business segments: Legal Professionals, Reuters News, Global Print, Corporates, and Tax & Accounting Professionals.

In the second quarter of 2021, its sales grew by 9% to $1.53 billion, while organic growth was marginally lower at 7% compared to the year-ago period. Thomson Reuters’s adjusted EBITDA rose by 5% to $502 million, and adjusted earnings per share stood at $0.48, indicating year-over-year growth of 9%. The company managed to increase its free cash flow by 25% to $379 million.

The media heavyweight has managed to increase its sales from $5.5 billion in 2018 to $5.98 billion in 2020. Its operating income has increased from $775 million to $1.91 billion in this period.

Analysts tracking the stock expect sales to rise by 4.9% to $6.28 billion this year and by 4.7% to $6.57 billion in 2022. Comparatively, its earnings per share are forecast to grow at an annual rate of 15% in the next five years.

Given these forecasts, we can see that Thomson Reuters stock is trading at a forward price-to-2021-sales multiple of more than nine, while its price-to-earnings multiple is also steep at 60. It seems that Thomson Reuters stock is trading at a premium and will remain vulnerable in a market meltdown.

While the TSX has returned 68% to investors in dividend-adjusted returns in the last five years, Thomson Reuters is up by an impressive 186% since September 2016.

Strong financials

Thomson Reuters’s valuation is sky high, but its fundamentals remain strong. It ended Q2 with a cash balance of $2.42 billion and carries $4 billion of debt on its balance sheet. The company has generated $2 billion in operating cash flows over the past year, allowing it to offer investors a dividend yield of 1.4%. A low payout ratio of less than 12% suggests the company has enough room to grow its dividends going forward.

Thomson Reuters has also enhanced shareholder value via a buyback program. It recently announced a share-repurchase program worth $1.2 billion. The company has already returned $800 million to investors in the first six months of 2021 through dividends and buybacks.

Thomson Reuters expects to save $600 million in operating expenses by 2023. It aims to reinvest $200 million into the business, resulting in net savings of $400 million.

While Thomson Reuters has crushed the broader markets in the past decade, the stock remains vulnerable due to its frothy valuation and a volatile equity market. Analysts tracking the stock have a 12-month average price target of $113 on Thomson Reuters, which is 20% below its current trading price.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Aditya Raghunath has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

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