Ann: S&P DJI Announces September 2023 Quarterly Rebalance, page-6

“where to now is the question? the multiple has expanded substantially for a professional services company (albeit one that is incredibly well run and with the tailwinds of ‘digital transformation’, and we now have had passive buying. The high dividend payout ratio makes me especially loathed to realise a tax liability and pay the tax man, but can we just have our heads in the sand regardless of valuation? What sort of multiple would you consider taking some chips off the table?”

@Just_a_guy,
I missed your post at the time so apologies for the tardy response - although it doesn’t matter because just as I didn’t have an answer for you then, I still don’t today, as I’ve given up on trying to know what sort of multiple today is the right one, and the one at which I will sell.

Yesterday’s update implies earnings growing at 24% (that’s off a previous corresponding period base which was up 32% on its pcp base which, in turn, was 33% higher than its pcp base, which was up on its pcp base … and so on).

Assuming the second-half growth is a bit slower than the first half, so say 20% (no reason why it shouldn’t be that sort of figure), that would leave the P/E at around 28x.

Looks steep, prima facie, but only if one thinks:

a.) DTL will cease to be able to provide a pre-eminent service to its client base,
or
b.) technological change will cease

The reasonable view is that neither of those will occur; well, for a), not in the next several years and for b), never (for the next, I dunno, 5 or 7 years systems will have to be overhauled/reconfigured/modified for the sweeping changes AI is going to bring about), which means that the growth is highly likely to continue at a rate of oh, pick a number: say, 20% pa.

This would leave the P/E this time next year at under 24, and twelve months later it will have been chewed down into the high teens, which might be the right multiple if DTL has come to the end of its growth runway by then, but I’ll wager London to a brick that it will continue growing in years 3, 4, 5, etc…

And that’s the P/E which, given the significant through-the-year average net cash holdings, is not the most representative metric, I don’t think. I far prefer EV/EBIT which – based the above growth scenario – would end up somewhere around 13x at the end of the forecast period. Hardly a tall order.

With companies like this, every time I’ve taken a few chips off the table, what has happened is that the company has continued to outperform and the share price has continued to rise, and I’ve had to give some of my profits to the government of the day to mis-allocate.

So, short answer is that I’ve learnt to do nothing, other than to merely check in three times a year: in February (interim result), August (final result), and briefly in October (AGM).

/