The Dicker Data Limited (ASX: DDR) share price and company is another beneficiary of the COVID-19 pandemic.
The DDR share price has more than doubled since March 2020 and I am left wondering if what’s happened will continue to act as a sustainable tailwind in a post-COVID economy.
Here’s a bit of a background as to what has happened this year and a few of my own thoughts.
What does Dicker Data do?
Dicker Data is an Australian wholesaler of technology hardware, software and cloud-related solutions that has been operating since 1978. It distributes to over 5,500 resellers and through established agreements, it’s able to be an official distributor of well-known brands such as Toshiba, Cisco, Hewlett Packard Enterprise, Microsoft, and many more.
The majority of its revenue comes from selling hardware, however much of its recent growth has come from its software segment, which accounts for around 20-25% of total revenue. Revenue from software sold on a subscription-based model is recurring.
Dicker Data’s COVID Tailwind
The intuition as to why Dicker Data has been a winner from the pandemic is fairly straightforward. The work from home revolution saw a huge spike in demand from individuals upgrading their home office setups.
The result of this was some impressive figures coming out of the HY20 report. The company managed to grow its half-yearly revenue by 18.1% and unlock some operating leverage with its gross margin and net profit increasing by 24.8% and 23.6%, respectively. Management indicated that the increase in margins was the result of increased focus on mid-market and SMB businesses.
This company has historically operated on some of the lowest margins I’ve seen in a long time. To put it into some perspective, affordable jewelry retailer Lovisa Holdings Limited (ASX: LOV) achieves a gross margin of around 80%, whereas Dicker Data typically achieves a gross margin of around 9% and a net margin of just 3%.
This is clearly a really tight operation that Dicker Data is running. The gross margins are extremely low, to begin with, but on top of this, the company then has capital expenditures and debt repayments to manage before it arrives at its net income figure, which is then all paid out as a dividend.
Despite these perhaps concerning business economics, the company has done a remarkable job of efficiently using contributed equity to grow its profit over time.
Some interesting points about Dicker Data
Dicker Data runs a slightly unconventional dividend policy and pays out 100% of its earnings to shareholders in the form of dividends. CEO David Dicker does not pay himself a salary and solely relies on dividend income to the tune of around $18 million per year.
The company has further growth plans and is currently constructing a new distribution centre that is on track to be completed by the end of the year. The projected was partly funded by a $55 million capital raise that was completed earlier this year.
This capital raise also allowed Dicker Data to be part of the S&P/ASX 300 (ASX: XKO) index. For a company to be listed on the index, the public must own at least 30% of the company’s shares. Insider ownership previously accounted for around two-thirds of the company, so the raise was enough to dilute the ownership enough so it complied with the listing rules.
The addition to the ASX300 index also provided some quick upside in the share price in September due to passive funds and institutions rushing in to buy shares to accumulate their own positions.
Are Dicker Data shares a buy at current prices?
I’d be willing to say yes. I can’t see Dicker Data being a temporary beneficiary of COVID-19 compared to some others. The company was more than succeeding even without the COVID tailwind, and I don’t see why it shouldn’t be able to continue on this growth trajectory.
On a P/E ratio of 29, you could argue that there is some optimism priced into that. However, if you just view this investment as a dividend stock then capital gains could be thought of as a nice added bonus on the side.
You could put forward the argument that now home offices have been upgraded, there may be a temporary pullback in demand for these sorts of products. However, it could also be argued this might result in some recurring revenues as these new setups are maintained over time.
I don’t think the company would be too concerned over this any way to be honest, as it’s mainly looking ahead for further growth opportunities such as the rollout of 5G which it can capitalise on through new devices and infrastructure required.
