Thanks to its share price steadily marching higher and paying a dividend that has risen annually for 24 consecutive years, FactSet Research Systems (FDS -1.03%) has delivered total returns of around 12,500% since its 1996 initial public offering.
While you can't simply point to past results and say, "This stock's a lock to continue this outperformance for decades to come," finding certain traits among successful businesses can tilt the odds of picking a winning investment in your favor. For example, FactSet is home to the well-funded dividend mentioned earlier, a history of buying back its shares, and a high cash return on invested capital (ROIC) -- three indicators with a track record of delivering market-crushing returns.
Pair these promising qualities with the fact that FactSet has grown its sales for 43 consecutive years, and the company looks like a true no-brainer to buy and hold forever.
So, how does FactSet do it? Let's dig in.
FactSet's user-friendly financial data and analytics
Despite playing second fiddle to Bloomberg in the financial data and analytics industry, FactSet and its digital platform for the investment community have nonetheless carved out a highly profitable niche. Currently, the four-decades-old financial data company offers its investment professional clients three core workflow solutions:
- Research and advisory (42% of sales): Company and market analysis, idea generation, presentation amalgamation, and research management.
- Analytics and trading (33% of sales): Quantitative research, portfolio research, trade simulation, and risk management.
- Content and technology solutions (25% of sales): Providing data utilizing FactSet's content and technology.
Roughly half the price of a Bloomberg terminal, FactSet's offerings focus on being user friendly with an emphasis on customer service -- two areas where its peer doesn't compete as well.
While it is virtually impossible to quantify just how good FactSet's user experience and customer support are, its net promoter score (NPS) of 34 is the best among its peer group, according to Comparably. Rated on a scale of negative 100 to 100, NPS measures how likely a company's customers are to recommend its product to a friend, with a positive score being the breakeven for a satisfied customer.
Furthermore, FactSet boasts an incredible 95% annual subscription value (ASV) retention rate. This demonstrates that most of the company's nearly 8,000 clients and 190,000 users are happy customers, which helps explain FactSet's 43 consecutive years of increasing sales.
Immense free cash flow feeds this compounding machine
As impressive as the company's steady, prolonged sales growth has been -- including 9% annualized growth over the last decade -- its free-cash-flow (FCF) creation may be even more remarkable. Over the last year, FactSet has maintained an incredible 25% FCF margin, even after accounting for stock-based compensation.
Generating consistently high FCF margins from its subscription sales, the company has ample funding to reinvest in its operations through research and development (R&D) and mergers and acquisitions (M&A). And sporting a cash ROIC of 31% as a public company, FactSet's track record of deploying capital successfully is top-tier among its fellow S&P 500 peers.
Cash ROIC measures how much FCF a company generates compared to its debt and equity. Companies with persistently high ROICs tend to outperform their peers and often indicate the stock's operations may have a wide moat, making them hard to disrupt.
Riding this virtuous cycle between high FCF generation and high ROIC using this cash, FactSet has plenty of excess funding (even after R&D and M&A) to raise its dividend payments and buy back shares consistently.
FDS Shares Outstanding data by YCharts
While share repurchases were suspended in 2020 amid the pandemic and as FactSet saved cash for its $2 billion acquisition of CUSIP Global Services, it bought back $110 million worth of its shares in the fourth quarter and looks intent to resume lowering its share count again.
Is now the time to buy FactSet?
Trading at 30 times FCF, FactSet is neither outrageously expensive nor cheap. However, had investors bought it at an even higher price-to-FCF in 2007, their investment would still have grown eightfold. This simple example highlights the power that compounding stocks (specifically those that buy back their shares and raise their dividends over time) provide, even at above-market valuations.
Thanks to this compounding nature and FactSet's track record of retaining customers and growing ASV, the company is a no-brainer candidate for adding to over time with dollar-cost averaging on dips.
