The best companies have a lot in common. They dominate their industries with products that are best in class and always in demand. They have a history of profitability through all economic cycles. They have low and manageable debt levels. They reward shareholders with dividends that tend to rise over time.
Many of the best companies also have underappreciated or hidden assets, which are the closest thing to something for nothing you can get in investing.
The assets can be real estate, which is carried on company books at cost but over time appreciates considerably. Customer loyalty is another. Keeping customers is cheaper than finding new ones.
Research and development spending is a big one. R&D costs are written off immediately, but they create new products over time.
A report by the Nasdaq stock exchange looked at some top American R&D spenders. It found that Amazon.com (NDQ: AMZN) was a leader, though its financial statements do not mention R&D as a separate line item. Amazon spent US$42.74 billion in the fiscal 2020 (11.1% of sales) on ‘technology and content.’
Alphabet (NDQ: GOOGL) spent $31.5 billion or 15.1% of revenue that year to enhance its search engines, improve YouTube, and experiment with such things as driverless cars.
Microsoft (NDQ: MSFT) will spend 12% of revenues or US$24.5 billion this year to enhance its cloud and AI capabilities and explore such things as the metaverse and augmented reality.
In Canada, car parts firm Magna International Inc. (TSX: MG) is top of the list with R&D spending of $1.1 billion in 2020 or 2.5% of sales. It’s followed by Constellation Software (TSX: CSU) and Shopify Inc. (TSX: SHOP) according to Research Infosource Inc., a data analytics company. All these companies are on the IWB’s recommended list except Constellation.
Another hidden asset is business units that are being groomed for a spin-off. Spin-offs tend to be successful over time because the parent uses its expertise to build the new company and wants it to succeed post spin-off because the parent usually retains a stake. Some successful examples in the past decade include eBay’s spin-off of Paypal, drug manufacturer AbbVie by Abbott Labs, and animal pharma company Zoetis by Pfizer.
Telus Corp., (TSX: T, NYSE: TU) best known to most Canadians for its telecom services, has a number of hidden assets that hold promise for investors, including spinoff potential. Here’s a closer look:
Background: Telus is Canada’s second largest wireless telecom company after Rogers Communications Inc. Its core business is internet and mobile phone services through the Telus and Koodo brands.
Performance: The shares are down 2.25% year-to-date at the current price of $29.12.
Recent developments: Telus had a strong third quarter in the three months ended Sept. 30. Revenue was up 10% to $5.4 billion, net income was 54% higher to $551million, and earnings per share were 48% higher to $0.37.
There were strong gains in its core business. The wireless division added 150,000 net subscribers, about 11% higher year-over-year and the biggest increase in a decade. It added 36,000 net new internet subscribers, which CEO Darren Entwistle said was industry leading and due in part to the close attention Telus pays to customer retention.
Telus International, where Telus retains a two-thirds stake, announced an agreement to acquire WillowTree Inc. for US$1.1 billion in October. WillowTree enhances TI’s ability to moderate online content and provide customer service chat robots. TI’s clients include Fitbit, Uber, and online gamer Zynga. The acquisition adds WillowTree’s clients including Fox, NBC, and Pepsico.
Telus spun off Telus International Inc. (TSX: TIXT) in 2021. It provides IT and customer service to 600 companies. Telus is using that model and its core data analytics expertise to groom its healthcare and agriculture units for similar treatment.
The Telus Health unit saw its quarterly revenue rise by $95 million or 73% in the quarter. The unit had revenues of $521 million in 2021 and helps medical and dental clinics manage bookings and organize records. It also connects medical professionals with patients via phone and internet.
Much of the third quarter growth was driven by the $2.9 billion acquisition of LifeWorks Inc. – formerly Morneau Shepell Inc. LifeWorks helps companies provide employee and family assistance plans, pension and benefits administration, and retirement planning.
Telus Agriculture & Consumer Goods also had a good quarter. Revenues increased by $19 million or 29%. The unit has made 11 acquisitions since 2019 in the software as service area and was renamed in July to include consumer goods.
This $400 million-a-year business has two main focuses. One is providing consumer trade promotions, helping companies match supply with demand for such things as two-for-one grocery store deals. It is the third largest global player in this area with customers that include Unilever, Nestlé, Johnson & Johnson, and Procter & Gamble.
The unit’s other focus is connecting farmers and seed retailers via an app. The app offers data analytics to help farmers determine such things as how much seed is needed for a certain acreage and how best to control weeds. The app incorporates weather patterns, soil composition, seasonal rain, and sunshine. Telus Agriculture could see a spinoff in the latter half of the decade.
Dividend: Along with its results, Telus announced a 7.2% dividend increase in its quarterly to $0.351 payable. It is its 23rd increase since 2011. The shares yield is 4.8% at current prices.
Summary: While Telus International, Telus Health, and Telus Agriculture account for about 16% of overall revenues, they have strong growth profiles. The parent is a top 10 Canadian R&D spender. It pays a high, sustainable, and growing dividend. It invests in consumer loyalty and is grooming operations for spinoffs. These are hidden assets with a lot of appeal.