Top Dividend Stock for 2017

Dividend Investor Canada's

Top Dividend Stock for 2017

Candidate #2

Dividend Investor Canada's

Top Dividend Stock for 2017

A special message from Bryan White, Lead Adviser,

Motley Fool Dividend Investor Canada

Dear Fellow Investor,

The next time someone tells you that dividend-paying stocks are "boring" or have no real growth potential, here's something you might want to point out...

According to data from renowned Yale economist and market researcher Robert Schiller, over the past century the S&P 500 index in the U.S. is only up about 900% when adjusted for inflation.

Surprised? Most investors are! But here's the truly shocking thing...

If, over that same time period you had simply reinvested your dividends, that return would jump to an incredible 58,623%.

That's a 65X difference! And if it's not proof positive of just how important it is to own stocks that pay dividends, I don't know what is! But let's face it... not all dividend-payers are created equal.

Some truly are nothing more than stodgy old "cigar butt" businesses that have no real potential to grow your underlying investment dollars over time.

Meanwhile, some super-high-yielders may simply not have the financial means to continue to pay out such a whopping dividend -- especially if they come from a more cyclical "boom and bust" industry like energy or mining.

And trying to separate the wheat from the chaff can be a very daunting -- and time consuming -- task. Honestly, it's enough to make many folks just forego investing in dividend stocks altogether.

14 January 2017

Which is why I wasn't the least bit surprised when a recent survey showed that a whopping 98.9% of our Motley Fool Canada readers and premium members would like more guidance on which dividend stocks to buy and when.

It's also why I am both so proud -- and so excited -- to have been selected to serve as the Lead Adviser for our newest premium investment solution, Dividend Investor Canada, which will have its grand opening on Thursday, January 19.

And because we want you to have everything you need to make a well-informed decision about whether membership in a service like this might be right for you...

In the days leading up to this this historic event, my team and I will be sharing our top three candidates for our Top Dividend Stock of 2017 -- which will also be our first official recommendation within Dividend Investor Canada.

Plus, we'll be posting a wide variety of other dividendfocused bonus content that we believe you'll find both very informative and very valuable.

Everyone here is extremely excited about the launch of Dividend Investor Canada and all of the pre-launch festivities that will precede it.

We hope you'll enjoy everything we'll be putting together for you -- and that you'll consider joining us in Dividend Investor Canada when we officially open our doors here in a few short days!

To helping making 2017 your most profitable year yet,

Bryan White Lead Adviser Dividend Investor Canada

P.S. -- As with all of our premium investment services here at Motley Fool Canada, Dividend Investor Canada is fully backed by a 30 day, 100% membership-fee-back guarantee.

So you're always welcome to "test drive" the service for a full month before really having to decide whether it's right for you. And if it's not, no problem! We'll happily return your membership fee in full. Full details will be made available the morning of Thursday, January 19. So please keep an eye on your inbox!

2 The Motley Fool

Top Dividend Stock for 2017

fool.ca

Absolute Software (TSX:ABT)

By Iain Butler

Absolute is a leader in the persistent endpoint security market, helping to protect more than 6 million computing devices world-wide.

Why we're considering buying:

? Ongoing adoption of mobile computing means there's significant potential for market expansion.

? High percentage of recurring revenues and low capital requirements are well suited to dividend payments.

? Potential growth creates attractive total return opportunity.

Headquarters:

Vancouver, Canada

Website: Industry: Volatility: Market Cap: Dividend Yield: Cash/Debt: Free cash flow (TTM): Dividends (TTM): Payout ratio: Total Insider Ownership*: Recent Price: TTM: Trailing 12 Months

Technology Medium CAD$250.0 5.0%

US$32.1/$0.0 US$(3.2) US$9.3 n/a 1.1% $6.40

Dollar amounts in millions except recent price. *Percentage of shares outstanding owned by insiders

Data as of 01/05/17

I'm located about 1,000 kilometres due north of the Fool's headquarters and while working remotely is relatively seamless, on occasion, face-to-face interaction simply has to happen. Which means, on an annual basis, I do a bit of work related travel. To be clear, I'm a relative lightweight in this regard, however, every time I hop on a plane for the trip to HQ, I fear that something adverse may happen to the primary tool of the trade ? my laptop.

This is a scenario that presents itself millions, and potentially billions of times each and every day. Want proof? Go to a travel hub ? airport, train station, bus depot, subway stop ? on any given Monday through Friday. Laptops and other portable computing devices abound. The freedom that these tools provide is wonderful, however, they present significant risk on multiple levels, not only for the individual brandishing the device, but the entire enterprise into which that device connects.

Absolute Software is here to help with this risk and provide considerable peace of mind to its more than 20,000 customers worldwide. You see, Absolute's Persistance technology allows its customers to track and secure remote devices, as well as allowing visibility into applications, useage, and whatever else goes on with that machine. Essentially, it's like having an IT person sitting inside the device at all times.

Stolen/lost device? No problem. Security threat detection? Check. Mysterious download activity? On it.

Absolute's offering turns the potential for the dire scenario that I envision every time I travel into more or less a moot point. And then some.

The Business

Part of the magic of Absolute is that its offering comes embedded into the firmware of laptops and other mobile devices at the point of manufacture by most of the world's leading manufacturers (OEMs). This collection of OEMs include such heavyweights as Acer, Dell, Lenovo, Microsoft and Samsung. The company's Persistance technology is shipped in a dormant state and is activated after the customer purchases and installs the Absolute Data and Device Security (DDS) software agent.

Customer arrangements are contracted under a pre-paid subscription licensing model with terms ranging from one to five years. Orders tend to flow from the customer to the OEM partner who then places the order with Absolute. Cash is collected up front (non-refundable) and revenues amortized over the life of the contract (more on this dynamic below). Because these subscriptions are non-refundable, recurring revenues are high, to say the least. In the company's last reported quarter, recurring revenues measured a whopping 98% of total revenues.

Opportunity

Given that its Persistance technology has been shipped on billions of devices found all around the world, it may surprise that revenues for this company are essentially where they were three years ago. Growth has been an issue, however, there's hope on this front.

You see, the device this note was created on, being a Dell product, may well have Absolute's technology buried somewhere within. I however am not a client, even though I probably

fool.ca

Top Dividend Stock for 2017

The Motley Fool 3

should be. Herein lies part of the opportunity. This company has A LOT of potential if it can come up with the formula to increase activation on even a slightly increased percentage of its installed devices that exist in the world.

Internal shuffling has occurred to turn this potential into reality with a reorganization of the sales force showing some traction given recent customer acquisition activity. Added to the customer roster in the first quarter of fiscal 2017 were the likes of United Continental, CIGNA, Deloitte, Under Armour, and the NYSE. However, significant opportunity remains. And with a mere 15% of revenues currently generated outside of North America, yet with international markets accounting for 50% of the global IT security market, much of this opportunity is global in nature.

Dividend Sustainability

While the company figures out the right formula, the existing business could be classified as "nice" and given the recurring revenue stream, lends itself to dividend payments. One thing to keep in mind on this front was mentioned earlier. Because revenues are amortized over the life of the subscriptions, the income statement isn't necessarily reflective of how this company is currently performing.

For a better picture, we turn to the cash flow statement. As illustrated in the table below, there you'll see that free cash flow has consistently been well above the cash required to fund the dividend.

2012 2013 2014 2015 2016

Cash from ops

$18.9 $17.5 $15.5 $23.0

$4.9

Capital expenditures

$0.9 $0.9 $1.7

$2.9

$3.4

Free cash flow

$18.0 $16.6 $13.8 $20.1

$1.5

Dividends

$4.1 $9.3 $10.1

$9.3

Payout ratio

24.7% 67.4% 50.2% 520%

Data provided by S&P Global Market Intelligence

There was a hiccup on this front in 2016, however, the issues appear to be one-off and therefore not worth spending much time on. Looking forward, we see the company's current yield as being very much sustainable, and potentially growing.

Adding to our confidence is the cash position on the balance sheet. With $32 million of net cash, even if operating cash flow temporarily dries up, the dividend remains affordable.

What We're Watching

Dividend sustainability is not our concern with Absolute. What we're watching boils down to why so many of its firmware devices remain dormant. Here's a company that essentially has customers sitting in the palm of its hands. And a product that makes a pile of sense. All it has to do is coax these potential customers into turning this product on. But yet, growth is rather anemic. It's a bit of a head scratcher.

One observable issue that we might point to is pricing related. Absolute reported Q1'17 revenue of $22.5 million with a subscription base of 20,000 customers or six million devices. That equates to about $1,125 per customer in the quarter or $3.75 per device.

Translation, an expensive product this is not. For this company to achieve $100 million in revenue, which represents 14.5% growth, about $13 million in additional revenue is required. Which means, about 2,900 clients or 900,000 more devices need to activate and subscribe to Absolute's DDS software. For some perspective, we've known about this company for approximately three years, and it had 20,000 customers when we first looked at it. In other words, expanding the customer base by this magnitude seems like a tall order.

Foolish Bottom Line

You could do worse than investing in a company that provides a 5% yield with the potential for growth. However, we're a tad wary of how much weight to put on that "potential". That it has absolutely no financial risk at least provides every opportunity to figure it out. Given the company is being so closely considered as our top dividend paying stock for 2017, you can be sure we're going to be looking at this dynamic from all different angles before settling on our final decision.

4 The Motley Fool

Top Dividend Stock for 2017

fool.ca

How to take the next step with Dividend Investor Canada...

We hope you enjoyed getting the full story on Absolute Software, and that it has given you a better idea of why the team is considering naming it their Top Dividend Stock for 2017 -- as well as the first official pick for their Dividend Investor Canada service.

If you haven't already had a chance to do so, we'd encourage you to also have a look at the "executive summary" video that Dividend Investor Canada analyst Taylor Muckerman and Co-Adviser Iain Butler recently recorded, which will give you even more insights into why they have their eye on this unique dividend payer.

We'd also ask that you please be on the lookout for a very special bonus report we'll be sending you on Monday, January 16... as well as the full details on the team's final candidate for Top Dividend Stock for 2017, which will be unveiled on Tuesday, January 17.

In the meantime, should you have any questions about Absolute Software, any of the other free content we're making available, our Dividend Investor Canada service, or even just dividend investing in general, please feel free to send them to dividends@fool.ca and a member of our team will get back to you as soon as possible.

We're thrilled that you've decided to follow along with all of the festivities leading up to the grand opening of Dividend Investor Canada on Thursday, January 19 -- and we sincerely hope you'll consider joining us as a Charter Member.

Thank you again for your time and interest, and as always, Fool on!

Disclosure: All figures as of January 5, 2017. All dollar amounts are represented in Canadian Dollars, unless otherwise noted. As of the most recent update (January 5, 2017), David Gardner owns shares of Under Armour (C Shares). The Motley Fool owns shares of Under Armour (C Shares).

This report is: (a) for general information purposes only and not intended as investing advice; and (b) not to be used or construed as an offer to sell, a solicitation of an offer to buy, or an endorsement, recommendation, or sponsorship of any entity or security by The Motley Fool Canada, ULC, its employees and affiliates (collectively, "TMF"). This report represents the opinion of the individual author and does not attempt to give you professional financial advice or advice that relates to your personal circumstances.

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