Computer Associates (CA) is one of two large-cap companies writing software for mainframe computers, providing vital transaction processing capabilities for megacap customers, and maintaing a stable business with significant cash flow and some dividend growth, says Brian Frank, President of Frank Capital Partners LLC.
“Mainframe might sound like a term from the 1970s, but it’s used today in things that are mission-critical, like credit card transaction processing and trade execution at Goldman Sachs (GS). So they use mainframe computers primarily from IBM (IBM), and these are the only two companies that actually write the software for it. So it’s an extremely stable business, it has extremely high cash flow and yet they are very out of favor right now because there hasn’t been a lot growth at CA,” Frank said.
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CA increased its distribution in 2012, but the company continues trading relatively inexpensively. He adds that the software developer can withstand macroeconomic pressures and produce cash even when in times of weak macro performance.
“There hasn’t been any contraction either and the cash just keeps coming in. They raised the dividend significantly last year and the stock price still is kind of languishing around the mid-$20s. All the names I mentioned are cycle-proof. If the economy were to get a lot weaker, CA would still be producing a lot of cash. So that’s something we’re intently focused on,” Frank said.
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