Profit from authentication technology

With a cash-adjusted forward PE ratio of 10 and a 7.2 per cent dividend yield, this small technology company is below the radar of many investors at the moment. However, the company is in an earnings upgrade cycle, having forced analysts to push through three upgrades already this year, and that follows a decent outperformance in 2021. A thumping 8.5 per cent free cash flow yield and an asset-light business model with eye-watering cash conversion rates support the case for further growth in the dividend pay-out.

Capitalising on the big trend in security and authentication for bank notes

The estimated number of banknotes in circulation increased by 12 per cent for the US Federal Reserve and 14 per cent for the Bank of England in 2020/21. Furthermore, there has been relative growth in high-denomination notes (that would contain covert security features) as part of the mix – these are more likely to be held outside standard banking systems – highlighting the importance of central bank currencies as stores of value where these are Reserve Banks. 

The painful collapse in the value of cryptocurrencies in the past 12 months also highlights that the vast majority of digital currencies do not act as a store of value, nor for that matter a medium of exchange given the difficulty in carrying out transactions using them. They lack the security offered by fiat currencies, too, as the spate of cryptocurrency thefts from digital exchanges shows.

In his keynote speech at this year’s Banknote and Currency Conference, the Federal Reserve Chief Payments Executive Mark Gould discussed cash and the Federal Reserve’s payment strategy, concluding the importance of banknotes as a store of value, and the trust that a high portion of the population place in banknotes, as evidenced by increases of cash withdrawals of higher denomination banknotes. The war in Ukraine and the heightened geopolitical uncertainty can only support demand for hard currencies given the perception they are a store of value.

Of course, the growth in new digital payment mechanisms and legitimising platforms has changed the landscape, but equally there is a recognition that future cash usage will, for many central banks (and specifically reserve banks), be measured in decades (Federal Reserve suggests 50 years, and Pakistan even longer than that). So, whilst the volume of notes and coins may gradually decrease in volume over time, the complete replacement of cash is a long, long way off. Indeed, over 150bn banknotes are manufactured each year and banknotes are still used in 85 per cent of all transactions. To paraphrase Mark Twain’s famous quote, “Rumours of the death of cash are greatly exaggerated”.

This company is perfectly poised to take advantage of security needs for cash in the modern economy and it's an opportunity that has so far flown under the radar of many investors. It has not only been delivering bumper profit growth in recent years, but is in a strong earnings upgrade cycle:  a factor that supports a continuation of the board’s highly progressive dividend policy.