Software operator could slash dividend

Constellation has paid out yearly since 2012

Canada's second-largest tech company by market value, said it's considering eliminating its quarterly dividend and using the cash to make larger acquisitions.

Constellation chairman Mark Leonard said in a letter to shareholders that the company's board decided Friday to stop paying special dividends “in all but the most compelling circumstances” and may cut the regular quarterly payout too, if it can find deals.

The stock rose 3.47 per cent to $1,670 in Toronto trading on Tuesday..

The Toronto-based company buys and operates specialized software businesses and has produced huge returns over time with that strategy.

The stock rose 3,223 per cent over the 10-year period ended Dec. 31, 2020. With a market value of $34.2 billion (US$27 billion), it's one of Canada's 25 most valuable public companies.

Shopify Inc. is Canada's largest tech company with a market cap of $227 billion.

Constellation has built itself by making dozens of small deals for business software providers, and its companies serve almost every industry.

In the fourth quarter, the company did 18 acquisitions, spending a total of US$179 million or about half of the company's free cash flow, CIBC analysts Stephanie Price and Scott Fletcher wrote in a Feb. 15 note.

“We see upside from larger acquisitions as companies in distressed industries potentially look to divest assets as the effects of the pandemic linger,” the analysts wrote.

Constellation has paid a regular quarterly dividend of US$1 per share since 2012 and has paid three special dividends in the past decade — the last being a payout of US$20 a share in 2019, according to data compiled by Bloomberg.

But Constellation is now changing its thinking, Leonard said in his letter.

The company will try to increase the number of large acquisitions it makes of vertical-market software (VMS) companies — deals “requiring multi-hundred-million-dollar equity cheques” — and may sacrifice the payout to do so, he wrote.

“If we are successful in acquiring one or two large VMS businesses per annum, then I anticipate that CSI's return on investors' capital will decrease, but we will not have to return any of our free cash flow to shareholders,” Leonard wrote.

It's also beginning to look for deals outside of the VMS industry, the chairman said.

“That will require highly contrarian thinking and is likely to be uncomfortable in the early going. Hopefully, we have built enough credibility to warrant your patience as we explore new and underappreciated sectors,” Leonard said.