Should you buy, hold or sell Dicker Data shares?

David Dicker, CEO and co-founder of the company that bears his name, Dicker Data (ASX:DDR) likes to move fast. Very fast.

He tried to buy the Formula 1 team Williams, and when that fell through, tried to set up his own team, but the powers at be knocked him back.

He even has two race tracks on his property in New Zealand.

The growth of Dicker Data

Since listing 13 years ago, Dicker Data's share price has grown from $0.25 to more than $12 as of March 5, which equates to a compound annual growth rate (CAGR) of 35%.

In the world of investing, that is F1 speed with Le Mans endurance.

It also consistently pays fully franked dividends and the dividends per share (DPS) have been growing at an average rate of more than 17% for the past five years.

It is currently trading at a healthy forecast dividend yield of 4.4% fully franked, and unusually for an Australian company, it pays dividends each quarter.

The dividend policy is to pay out 100% of earnings as dividends, with a consistent dividend for the first three quarters and then the final dividend determined once the results for the year are known.

What does Dicker Data do?

Dicker Data is a distributor of IT hardware and software and cloud products.

It sources products from the world's leading technology companies such as Microsoft, Dell Technologies, Cisco, HP, VMware and others. It then distributes those products to a base of some 12,000 resellers who in turn sell to end users. Resellers typically include IT service providers, system integrators, government and education providers.

DDR was one of the two technology companies selected for the 2024 Stockopedia Top Stocks portfolio due to its high StockRank of 89.

Gross sales have been growing at a compound average growth rate of 17% over the past five years.

It has gone from $1 billion in 2015 to $3.3 billion in 2023. More importantly, earnings per share (EPS) has grown at 18% over the past five years, meaning that the top line growth is falling through to the bottom line. Sales are not just increasing as a result of acquisitions as is sometimes the case.

The dividend payout policy of 100% means that EPS and DPS growth are tied together.

As a business it is not afraid to use debt, and given it does not retain any earnings it must rely on debt for any expansion. That said, the debt levels remain within comfortable thresholds. The bankruptcy risk is low, debt to asset ratio is 34% and interest cover is 6.7 times.

At first glance there is a perception that DDR has little, if any, economic moat.

It is a very competitive market with two other major players and a number of smaller ones, all operating on very tight margins. However, closer analysis reveals that for a company to grow revenue and earnings at near 20% for long periods, it must have a competitive advantage, otherwise its competitors would eat away at its returns.

The competitive edge that it focuses on is being very efficient. Their underlying premise is next day fulfilment of orders.

The company and its competitors are all dealing with the same or similar suppliers so to gain an edge it has to be more efficient. One of their operating maxims is to keep net profit margin at 2.5%. Their competitors typically operate with a net margin of 1% to 1.5%. Their five year average net profit margin is 3.2%.

This sustained higher margin demonstrates that it does have a moat. Executives are highly incentivised to beat the net profit margin target of 2.5% as that is the point where a profit share incentive plan kicks in.

The remuneration structure of the top three executives is heavily weighted toward this performance component, and it is not capped, so the more the business earns, the more they earn.

Outlook for Dicker Data

Turning to the outlook, there are some positive signs. Demand for PCs has been in decline following the pandemic peak where a lot of sales were brought forward. However there are signs that this is bottoming out with organisations that renewed their devices before or during the pandemic due for a cyclical refresh.

Meanwhile, their data access and surveillance category, think cybersecurity, has been displaying strong growth. Enterprise customers are particularly conscious of this and it feeds into PC demand as they upgrade PCs to ensure they can support the latest cybersecurity software.

Adding to this is the fact that Microsoft will end support for Windows 10 in October 2025. Many organisations will upgrade their PC fleets to ensure they can run Windows 11.

All the buzz in technology is around AI. This could impact DDR in two ways.

Firstly, there is a move towards running generative AI applications, like Microsoft CoPilot, locally on a user's PC. This is leading to PC manufacturers working with chipset manufacturers to upgrade their hardware to handle the processing demands.

This may lead to another PC upgrade cycle. Second, governments and organisations are looking at enterprise-grade AI solutions and DDR is one of the main players servicing this space.

Dicker divorce

David Dicker and his former wife Fiona Brown founded Dicker Data in 1978. Ms Brown remains a director on the board.

Between them they retain about 52% of the company's shares. David Dicker sold a small portion of his shares during 2023 and then sold 10.2% of the total issued shares on March 6, 2024, due to a divorce settlement with his second wife.

There is an agreement between Dicker and Brown which gives Dicker the right to vote Brown's shares, effectively giving him control over the business.

This large share sale which took place at a discount of 9.5% to the last price, prompted a 10% fall in the share price.

The upside is that it increases the free float available meaning there will be more liquidity in the stock. The underlying fundamentals of the business haven't changed.

In terms of valuation, DDR's high quality is well recognised by the market and so the stock is priced accordingly.

The share price has risen 41% since July last year even with today's price fall. However, the valuation metrics have not reached excessive levels. The forward PE ratio is 21. The tight profit margins are a risk but given the track record it is certainly worth a close look.

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