DST Systems' Divestiture Will Free Lots Of Cash: Here's How They Might Spend It

The Divestiture And Possibilities

DST Systems has agreed to sell its North American Customer Communications unit to Broadridge Financial Solutions, Inc. BR for $410.0 million in cash.

"Revenue could end up 1–2 percent better than we model (could add ~$0.10–0.20). We view our 1 percent organic const-fx growth assumption for Financial Services as reasonably conservative, and we model decelerating growth in Health in Q2," analyst David Koning wrote in a note.

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Following is the analyst's review of uses of the cash:

• FCF: "We estimate ~$360 million in H2-16 and 2017."
• Buybacks: "We estimate ~$525 million in H2-16 and 2017."
• Dividends: "~$60–65 million in H2-16 and 2017."
• Excess Cash: "~$85 million, which could be used for acquisitions or additional buybacks."

Rating, Estimates And Justification

However, the analyst has cut his EPS estimates for 2016 and 2017 to reflect the lost earnings from the divestiture. Koning lowered his 2016 EPS view to $6.56 from $6.86 and trimmed his 2017 EPS estimate to $7.00 from $7.70.

Meanwhile, Koning maintains his Outperform rating on the stock, citing "generally stable growth firm (low/mid-single-digit revenue growth; high-single-digit EPS growth or better) with strong/defensible market share."

The analyst said the 2016 EPS would benefit from better margins and lower tax rate, each adding $0.10–$0.20 to EPS. In addition, buybacks driven by investment sales could add another $0.10–0.15+ to earnings per share.

"We don't model incremental asset sales driving buybacks, though this has been a recurring them in recent years. If the company sells ~$100–125 million during the rest of the year and buys back ~1 million shares, this could help annual EPS by $0.10–0.15+," Koning highlighted.

Koning has a price target of $132 on the stock, which is currently down 4.18 percent at $112.27. At time of writing, Broadridge was down 2.99 percent on the day, trading at $63.17.