We appreciate Fiserv (FI) for its consistency, in the form of 10 straight years of higher per-share profits, supported by higher sales and operating cash flow in nine of 10 years, explains Rich Moroney, editor of Dow Theory Forecasts.
That consistency stems from the company’s simple and reliable business model: Fiserv provides payment-processing and other financial-technology services for merchants and financial institutions.
Most of the company’s revenue comes from transaction-based fees via three- to five-year contracts. Processing and services accounted for 82% of revenue in 2023, versus 18% for products, mostly software.
The Growth Story
In 2023, Fiserv grew sales 8%, per-share profits 16%, and operating cash flow 12%. These results cap off an impressive five-year stint during which the company generated annualized growth of 27% for sales, 19% for profits, and 26% for operating cash flow.
Analysts expect growth to continue at rates similar to those from last year, with sales up 8% to 9% and per-share profits 14% to 16% in each of the next three years.
In recent years, Fiserv has generated the best kind of profit growth — supported by a combination of both higher revenue and fattening profit margins. Operating margins rose to 38.0% in 2023 from 31.0% in 2020. Consensus targets imply continued margin expansion.
Business breakdown
Fiserv makes its money through three business segments: Merchant acceptance (45% of sales, 40% of profits in 2023) provides customer-acquisition, e-commerce, and other solutions at the point of sales. This unit grew sales 12% and profits 23% last year.
We expect merchant acceptance to continue driving growth, as years of investment in the Clover payment ecosystem continues to pay off in the form of cross-selling additional services.
Financial technology (18% of sales, 16% of profits) processes payments, manages cash, and enables the origination of loans for financial institutions. Fintech revenue and profits were flat last year, reflecting a rough environment for banks.
Payments and networks (37% of sales, 44% of profits), the core payment processor, enables electronic bill payments, internet banking, and credit and debit card payments. This business increased revenue 7% and profits 13% in 2023.
Buybacks
Fiserv’s share count has declined 6% over the last year and 12% over the last three years. During that three-year period, Fiserv spent a net $9.9 billion on buybacks.
Investors have rewarded Fiserv’s consistency with a 25% return over the last year, including 9% growth so far in 2024. Despite those gains, the shares seem attractively valued at 19 times trailing earnings, 51% below the three-year norm of 39. Fiserv is a Focus List Buy.
