A David Among Goliaths 

11/11/2009 10:06 am EST

Focus: GLOBAL

Carla Pasternak

Editor, The Income Investor

Israel's Formula Systems packs a big dividend on top of its strong track record, writes Carla Pasternak of High-Yield International.

Today's [pick] delivers a stratospheric 20% yield. No, the yield isn't high because the stock price has plummeted. In fact, the shares have rocketed a remarkable 66% so far this year and more than tripled off their March lows.

And yes, Formula Systems (Nasdaq: FORTY) can afford to pay this astronomical dividend. After forking over $30 million in dividend payments last year, it still has $134 million in cash and short-term investments. In addition, it holds very little debt, with total debt just 23% of total capitalization.

This company is tucked away in the little-noticed but high-flying Israeli market, which has soared 58% so far in 2009. In addition, this gem has actually increased per share operating profits 58% over the past year thanks to continued demand for its products that help businesses save money in the midst of a recession. In short, [Formula Systems] is perfectly positioned in a growing niche market of the information technology sector.

Founded in 1985 and headquartered in Herzlia, Israel, Formula Systems is a global technology firm. It develops and sells software serves business customers in over 50 countries. Its products are used by companies in a myriad of areas from banking and insurance to airports and retail. Formula's recession-proof technology focuses on reducing costs and making businesses more efficient.

One of its products, for example, reduces the complexity of programming software and extends the life of older computer systems. The company operates through affiliates and three main subsidiaries: Magic Software (Nasdaq: MGIC), Sapiens International (Nasdaq: SPNS), and Matrix. Trading as an American Depository Receipt (ADR) in the US since 1997, the shares are majority-owned by Israeli telecom provider Emblaze.
 
FORTY has typically paid dividends once per year since 2005 (in 2007 there was no dividend). Payments vary as the company has a policy of paying out sums "not planned to be used for investments in the near future." However, even with no dividend in 2007, annual payments have averaged $1.69 over the past five years.

The last dividend of $2.27 per share for the 2008 year was paid in February 2009 and gives the stock a trailing yield of 20.5%. The payout represents around 70% of the company's free cash flow of $3.28 per share in 2008. 
 
Formula Systems has weathered the global downturn well. For the first six months of 2009, revenues were off a modest 6.5% in US dollar terms to about $269 million. The company has aggressively reduced administrative and selling expenses, as well as money laid out for research and development. Net income rose 8.4% to $13.8 million versus the first six months of last year.

Meanwhile, some individual business segments staged an even stronger performance. Sapiens, which offers software products to the insurance industry, reported a 360% rise in net income for the second quarter. Its shares soared as much as 31% on the announcement.

Trading at around 12 times last year's earnings, FORTY is attractively priced relative to peers such as Wipro (NYSE: WIT), which is priced at 33 times earnings.

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