Once a market favorite, its stock is now down nearly 40% this year.

Contracts have been cancelled. Growth has slowed. And AI is changing everything.

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But this company still has deep client relationships, a rock-solid balance sheet, and an important role to play in the next tech wave.

Most investors are walking away, but a few sharp ones are looking closer.

Why?

👉 It has the highest dividend yield in over 10 years.
👉 Its dividend has grown by a double digit CAGR for a decade.
👉 Profits and payouts are still expected to rise.

If you’re wondering whether this fallen giant could turn into a dividend powerhouse…
You’re not alone.

We’re digging deep into the full investment case for paid partners of Compounding Dividends.

And right now, you can test it out risk-free for 90 days.

You’ll get:

• Our full research on this opportunity.

• Why we think the sell-off may be overdone.

• And what could happen next if Wall Street wakes up to the income story hiding in plain sight.

No pressure. No guesswork. Just the facts.

If building wealth through dividends is your goal, this might be the perfect time to start.

👉 Click here to try Compounding Dividends risk-free for 90 days.

One Dividend At A Time

-TJ

Used sources

• Interactive Brokers: Portfolio data and executing all transactions

• Fiscal.ai: Financial data

Disclaimer

As a reader of Compounding Dividends, you agree with our disclaimer. You can read the full disclaimer here.

For 35 straight years, it has raised its dividend, while maintaining an occupancy rate that rarely dips below 98%.

The company’s focus on single tenants and long-term leases has made it a model of consistency in an otherwise cyclical real estate sector.

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NNN hasn’t been spared from the dynamics described here.

Over the past 3 years, the company has grown revenue by 6% per year and FFO per share by around 3% each year.

Despite that, the share price is down more than 5%.

Let’s show you how a REIT fits into our 10-step process and see if NNN is an interesting opportunity.

NNN REIT

General information:

• 🏪 Company name: NNN REIT

• ✍️ ISIN: US6374171063

• 🔎 Ticker:

• 📚 Type: High Yield Stock

• 📈 Stock Price: $43

• 💵 Market cap: $8.12 billion

• 📊 Average daily volume: $53.7 million

1. Do I understand the business model?

NNN is a U.S. based Real Estate Investment Trust (REIT).

The company owns over 3,600 properties across the United States.

These are single tenant retail properties leased to companies like 7-Eleven, Mister Car Wash, United Rentals, and Lifetime Fitness.

NNN doesn’t run any of the stores. Instead, it collects rent from the businesses that use its buildings.

These leases are long-term (10–20 years) and net leases. That means the tenant pays for things like maintenance, insurance, and taxes - not NNN.

NNN grows through increases in rent and by buying more properties.

NNN’s Acquisition Strategy

NNN is very focused, only buying single-tenant net lease (STNL) deals. These are smaller deals and typically happen one building at a time, but they fit NNN’s deep expertise.

You won’t see NNN buy a big portfolio, a strip mall, or a grocery store with an attached pharmacy.

That focus makes their results steadier and often better than peers.

Here’s why their approach works:

• Less competition - Few buyers spend time on these smaller deals, so NNN finds better opportunities

• Stronger tenants - NNN has built trust with about 25 strong, growing brands. Many even see their credit rating go up after working with NNN.

• Long-term thinking - They look at how a store could be reused in the future and how solid the tenant is today

• Custom leases - Terms are matched to each tenant and location. Risky stores usually won’t agree to long leases, which protects NNN

The results speak for themselves.

• Occupancy has averaged over 98% for 20 years

• Earnings are steady, even when rates rise

• NNN tends to get higher starting returns and more built-in rent growth than average

That means each acquisition grows NNN at above average rates - even when buying fewer properties.

In short: NNN’s harder, slower path gives them stronger, safer growth.

Sale-Leasebacks and Deep Relationships

NNN’s acquisitions usually come in the form of sale-leaseback transactions. This means that the company running the store sells the building and land to NNN, then immediately leases it back from them.

Why would a company do this?

Because the seller wants to raise cash but doesn't want to give up operational control of the property it's selling. A deal with NNN REIT can make that happen.

This brings up an important aspect to consider about NNN REIT: Roughly 75% of its transaction volume since 2010 has come from companies that it already has an existing relationship with.

Competitive Advantages

You might think that having competitive advantages would be difficult in retail real estate, but NNN has several:

High Occupancy

NNN has averaged about 98% occupancy for 20 years, far higher than most peers. They manage this by keeping rents around the market average, and by working with strong, growing companies.

Long, simple, steady net leases.

Most contracts run 10–20 years, giving reliable, predictable income. They also typically have rent increases built in.

Net leases mean tenants cover taxes, insurance, and maintenance, while NNN just collects rent.

Diversification

Over 3,600 properties across the U.S., with hundreds of tenants in different industries.

Relationship-based acquisitions.

NNN avoids auctions and instead buys smaller deals through long-term tenant relationships, often at better terms.

Financial strength.

With a BBB+ credit rating, conservative debt, and long maturities, NNN can handle rate changes and downturns.

You can see the results of these advantages through NNN’s 35 year streak of raising dividends, and steady Funds From Operations (FFO) per share growth of 3–4% annually.

2. Is management capable?

Stephen Horn, Jr. - CEO

Mr. Horn has been the CEO since 2022.

He’s been with the company since 2003, working on acquisitions and as the Chief Operating Officer before being promoted to CEO.

Vincent Chao - CFO

Mr. Chao has been the CFO since January of 2025.

Prior to that he was the Director of Finance for another publicly traded REIT RPT Realty, and Head of U.S. REIT Research at Deutsche Bank Securities.

He replaces Kevin Habicht, who retired from NNN after 32 years.

The management team at NNN has consistently grown the company’s FFO/Share:

3. Has the company grown the dividend attractively?

We look for:

• At least 10 years of dividend growth

• 5-year dividend growth >5%

NNN has grown its dividend for 35 years in a row.

• 5-year dividend growth rate: 2.4% annually

• 10-year dividend growth rate: 3.1% annually

NNN hasn’t met our 5% growth target, but this is a high-yield company. It has at least grown the dividend to match the average rate of inflation.

4. Is the company active in an attractive end market?

The retail real estate market is fairly mature.

However, vacancies have been trending down, and rent prices have been trending up.

Construction is also sluggish, which means the demand for NNN’s properties should remain strong and support continual rent increases.

5. What are the main risks for the company?

Tenant Risk

NNN relies on tenants (like 7-Eleven, Sunoco, LA Fitness) to pay rent. If a tenant fails or leaves, rental income drops.

Mitigation: NNN has over 3,600 properties with more than 400 tenants. No tenant is more than 4.5% of rent, so the risk is spread out. Many tenants are service or necessity-based businesses.

Interest Rate Risk

NNN borrows money to buy properties. If interest rates rise, borrowing costs go up and profits may shrink.

Mitigation: NNN keeps debt at reasonable levels and mostly uses fixed-rate debt. They’ve managed through many interest rate cycles before.

Retail Industry Changes

Some retail chains are struggling with online competition. If stores close, NNN could lose tenants.

Mitigation: NNN focuses on service-oriented and essential businesses - like convenience stores, gyms, restaurants, and auto service that people still need to visit in person

Property Concentration Risk

If too many properties are in one location or industry, a downturn there could hurt results.

Mitigation: NNN’s portfolio is spread across 49 states and many industries. This geographic and sector mix helps smooth out problems in any one place.

6. Does the company have a healthy balance sheet?

The real estate industry runs on debt. That means that we need to look at the balance sheet of a REIT a little differently than we do for a typical company.

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Welcome to this Special Early Edition of Compounding Dividends!

I didn’t expect to publish an earnings updates so soon, but there have been some moves in prices of quality companies, and we’re going to take advantage of them!

I’ll just cover the two positions we’re adding to today, and I’ll send up an update on the other companies that have reported earnings tomorrow.

Let’s get into the positions we’re adding to!

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Sales are slowing.
Profits are under pressure.
And the stock is down nearly 50% from its highs.

Most investors took one look…
And ran the other way.

But not us.

Because when we looked under the hood, we saw something different.

A business with an ironclad moat - and Nick Sleep’s favorite business model.
A management team playing the long game.
And a plan in motion to double revenue.

The kicker?
It’s trading at half its usual valuation - based on short-term concerns.

We believe this could be one of those rare moments...
When the market gives long-term investors a gift.

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UnitedHealth was trading at over $600 per share in 2024, and has since had a massive drawdown of more than 50% to around $250 per share. It’s since recovered some and has been floating around $300 per share.

What happened?

Basically a lot of bad news at once.

• April 17 – Disappointing quarterly earnings

• May 13 – CEO steps down and 2025 outlook suspended

• May 14 – Criminal investigation announced

On May 19, I published an article that went over the situation and my thoughts on the company. You can read that here:

But I didn’t follow our typical 10-step approach - there was too much going on to fit everything in one article.

Today, I’m making up for that by publishing the 10-step analysis of UnitedHealth Group.

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Novo Nordisk’s share price peaked in mid‑2024 at over DKK 1,000 then plunged sharply through early 2025. By late April 2025 it hit a 52‑week low of DKK 380, before modestly recovering to ~DKK 490.

That’s a drawdown of more than 60% at the low, and the stock is still more than 50% below the peak.

What happened?

There are five main reasons why the stock is down so much:

1. Disappointing trial results from CagriSema

2. Increased competition, mostly from Eli Lilly

3. Pricing pressures & regulatory challenges

4. Import tariffs from the United States

5. The CEO got fired

These are either temporary problems that present an interesting opportunity, or permanent ones that the market is correctly pricing into the stock.

Let’s dive into the company to find out which!

1. Do I understand the business model?

Novo Nordisk is a global pharmaceutical company. Their main revenue sources are from drugs that deal with diabetes and obesity.

Novo also has medications for rare diseases and cardiovascular problems.

The company focuses on discovering, developing, and manufacturing innovative drugs globally.

Novo Nordisk has a long history in a competitive industry. In 2023, the company celebrated its 100th(!) birthday.

Main Revenue Drivers

The obesity and diabetes markets are by far the most important for Novo - they made up more than 90% of revenue in 2024.

They offer two unique products:

• Ozempic for diabetes care

• Wegovy for obesity care

These drugs are both based on the same molecule called semaglutide.

Semaglutide is a medicine that helps people with type 2 diabetes and those trying to lose weight. It copies a natural hormone in your body to control blood sugar and reduce hunger.

Obesity Care is becoming more and more important in Novo’s revenue split. It’s one of the key growth drivers for the company, growing at more than 80% (!) per year since 2020.

The Diabetes Care market is growing at a still healthy 18% CAGR over the same time period.

The U.S. Market is also important for Novo Nordisk, providing nearly 60% of the total revenue for the company.

2. Is management capable?

This is one of the problems leading to the large decline in Novo Nordisk’s share price.

In May, the Novo Nordisk Foundation, the company’s main shareholder, pressured CEO Lars Fruergaard Jørgensen to step down after eight years in the role.

Jørgensen has been with the company since 1991 and led them to dominate the weight-loss drug market with Wegovy and Ozempic.

Lars Sørensen, the Chair of the Novo Nordisk Foundation (and former CEO from 2000 to 2016), said the following about this topic:

“Considering recent market challenges and the decline in the company’s share price, we expressed an interest in being closer to the discussions in the company’s board. We also think that the timing is right for a new profile as CEO of the company. The aim is to make sure that the company is optimally positioned to secure future growth and realise its great potential.”

The Foundation seems concerned about losing ground in the obesity drug market, especially in the U.S.

Sørensen rejoined the board as an observer to lead the search for a new CEO and plans to become a full board member soon.

He’s pushing for an external candidate, a first for the company, as all prior CEOs were Danish and internal hires.

They’re likely looking for someone with strong U.S. market skills to deal with competition, pricing issues, and potential policy shifts.

Camilla Sylvest, head of commercial strategy, also left in April 2025, adding to the leadership changes. The board, led by Helge Lund, insists the company’s strategy remains unchanged.

There is good news within Novo Nordisk’s management, however:

The Novo Nordisk Foundation owns nearly 30% (!) of the company with 1.3B shares.

There is also heavy insider ownership, with former CEO Lars Jørgensen owning more $400M USD in shares, CFO Karsten Knudsen owning $148M USD, and various VP’s owning significant sums as well.

Various board members also own nearly $25M USD in shares, so there should be alignment with shareholders both at the leadership level and the board level.

3. Has the company grown the dividend attractively?

We look for:

• At least 10 years of dividend growth

• 5-year dividend growth >5%

Novo Nordisk has a beautiful chart here:

• 5-year dividend growth rate: 22.3% annually

• 10-year dividend growth rate: 16.4% annually

  

4. Is the company active in an attractive end market?

Novo Nordisk treats obesity - a condition that affects 1 out of every 8 people alive today. That’s a billion people - and the number is growing globally.

Novo also treats diabetes. That market is projected to continue growing as well.

Even though the diabetes market isn’t growing as fast as the obesity market, there’s still lots of opportunity there. Why?

• 1 in 2 adults with diabetes go undiagnoesd

• Of the 537 million people with diabetes, only 43 million of them are treated with Novo Nordisk products.

Novo Nordisk, along with its only real rival - Eli Lilly - controls the entire market for modern diabetes and obesity drugs. They are a duopoly. That means they set the prices. They control the supply. And, more importantly, they control the future of this massive industry.

5. What are the main risks for the company?

All companies face risks. The market is pricing in lots of risks for Novo Nordisk at the moment.

Let’s go through the main ones.

1. Product and regulatory risks

The biggest near-term risk is pipeline disappointment. Novo’s high expectations for their new drug in diabetes and obesity, CagriSema is part of the reason for the collapse of the stock price.

In December 2024, Novo Nordisk published trial results for CagriSema.

People in the trial had an average weight loss of 22.7% over 68 weeks for participants.

This number is statistically significant, but it fell short of Novo's anticipated 25% target.

In March 2025, Novo Nordisk shared new trial results for CagriSema.

Patients lost 15.7% of their body weight in 68 weeks. That’s a lot. But investors wanted an even bigger number once again.

CagriSema was seen as a “next-gen” product, but it’s unclear if it’s better than what’s already on the market.

Mitigation:

CagriSema isn’t the only drug in Novo’s pipeline - they’re also working on Amycretin, which is a simpler, single molecule that targets the same GLP-1 and amylin receptors as CagriSema. In January 2025, early-stage trial results showed up to 22% body weight loss over 36 weeks, surpassing Lilly’s Zepbound (21%) at a similar time point. Phase II and III trials should begin next year and the drug could be on the market by 2029/2030.

Novo Nordisk also has the only approved GLP-1 oral medication with Rybelsus for diabetes - they’ve submitted a higher dose version for approval in the US for obesity, and will likely be the fist to market with an oral version of the weight loss medications - the current ones require an injection.

2. Competition

Eli Lilly entered the GLP-1 market later than Novo Nordisk, but with a more advanced molecule.

In 2022, Mounjaro (tirzepatide) was approved for type 2 diabetes. Unlike semaglutide, which targets only the GLP-1 receptor, tirzepatide is a dual agonist, activating both GLP-1 and GIP (glucose-dependent insulinotropic polypeptide) receptors. This dual mechanism enhances its efficacy for both blood sugar control and weight loss.

In 2023, Lilly gained approval for Zepbound (tirzepatide) for obesity, positioning it as a direct competitor to Wegovy. Clinical trials showed tirzepatide achieving 20.2% average weight loss after 72 weeks, compared to 13.7% for semaglutide, and superior A1C reductions (2–2.3% vs. 1.9% for semaglutide).

Lilly’s sales of diabetes and obesity drugs are growing rapidly, and in Q1, Lilly overtook Novo Nordisk for GLP-1 prescriptions for the first time with 53% of prescriptions written for Lilly’s drugs, vs 46% for Novo’s.

Mitigations:

The market and demand for these drugs is huge - Novo and Lilly both had to invest in manufacturing to keep up.

This will likely operate as a duopoly for a long time - neither company will be able to take 100% of the market share. It wouldn’t make sense to try to - the investment in manufacturing capacity would never be paid back before the drugs went off patent. Think of Boeing and Airbus - neither company can supply the global demand for commercial airliners. Novo and Lilly will likely be the same.

Novo has the first-mover advantage, and I’d argue more effective marketing - I bet you have the “oh, oh, oh, Ozempic” jingle in your head every time you read the word in this article.

They’ve also announced:

• That CVS had made Wegovy the preferred GLP-1 on their formulary

• Cash pay options starting at $499/month at CVS

• A partnership with Telehealth company Hims to offer Wegovy at reduced prices

Novo Nordisk also remains the leader in global GLP-1 Market Share:

3. Pricing and political risks

Novo faces pricing pressure globally. U.S. policymakers are scrutinizing GLP‑1 drug prices (e.g. a Senate inquiry into Wegovy/Ozempic pricing), and Medicare negotiation of diabetes drugs (expected 2027) could force price cuts. President Trump has signed an Executive Order to try to lower drug prices, and the ever present threat of U.S. tariffs on EU goods could inflate costs on European-made drugs.

Mitigations:

Novo is partially hedged from the tariffs by its increasing U.S. manufacturing investments - Novo acquired Catalent in late 2024 to expand U.S. manufacturing.

The executive order doesn’t have an effective enforcement mechanism in place, and a similar one was tried during the first Trump administration and was struck down in court.

GLP-1 medications are already rebated for Medicare, so the price Medicare pays isn’t the list price - it’s unclear how much negotiation will reduce prices there.

4. Patent Expiration

With so much revenue coming from Ozempic and Wegovy, patent expiration is a big risk for Novo Nordisk. The patents expire in 2031/2032 and revenue from GLP-1 medications will likely drop significantly once generic competition comes on the market.

Mitigation:

This is a big risk for all drug manufacturers. Novo Nordisk will need to either keep innovating or acquire new medications by buying smaller firms. They do have drugs currently in the pipeline.

The main mitigation to this risk is the low price that the market is currently offering Novo Nordisk at.

6. Does the company have a healthy balance sheet?

We like a Debt/Equity ratio < 50%.

Novo Nordisk currently has a Debt/Equity above that, but it’s typically much lower.

The company took on debt to finance the acquisition of Catalent.

They have huge free cash flow, and could pay off the entire amount of debt in less than one year.

The interest coverage ratio is currently over 40x.

Their balance sheet is rock solid.

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It’s grown its dividend nearly 9% per year over the last five years. And it’s done that while reinvesting billions back into the business.

This company is the undisputed leader in a mission-critical industry - one that every building, every airport, every hospital relies on.

It’s been growing steadily for decades, fueled by high-margin recurring revenue, smart acquisitions, and a product line that upgrades itself every few years.

It’s capital efficient. Shareholder friendly. And run by executives who own millions in stock themselves.

And right now?

It’s trading at an attractive yield, well above its long-term average.
The earnings growth model points to 11%+ annual returns.

And the market is assuming dividend growth far below what the company has delivered for over a decade.

This is one of those rare businesses you can buy, hold, and forget - while it compounds quietly in the background.

Let’s walk through the full case and prepare our buy for Monday.

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“I put two children through Harvard by trading options. Unfortunately, they were my broker’s children.” 

Today, we’ll look at the broker I use: Interactive Brokers.

Interactive Brokers - General information

👔 Company name: Interactive Brokers
✍️ ISIN: US45841N1072
🔎 Ticker: IBKR
📚 Type: Owner-Operator
📈 Stock Price: $180
💵 Market cap: $76 billion
📊 Average daily volume: $143 million

Onepager

Here’s a onepager with the essentials of Interactive Brokers:

15-Step Approach

Now, let’s use our 15-step approach to analyze Interactive Brokers.

At the end of this article, we’ll give Interactive Brokers a score on each of these 15 metrics.

This results in a Total Quality Score.

How we use Interactive Brokers

Before we discuss the investment case, it’s important to understand that I execute all my transactions through Interactive Brokers.

As you can see, our CAGR is significantly better than the S&P 500:

The screenshot above is the official track record from my account. If you want to explore more, you can find everything you need to know about Interactive Brokers here.

1. Do I understand the business model?

Interactive Brokers is an American online broker with over 3.6 million client accounts.

The company lets investors buy and sell almost any asset through its electronic platforms. It offers products from over 150 exchanges.

The company makes money in two ways:

• Interest income (60.5%): The interest income is earned on the cash reserves of around $100 billion that clients hold in their accounts

  • Interactive Brokers invests these reserves into debt securities and margin loans. They pay a slightly smaller rate to their customers, generating a spread on these cash reserves

  • Sounds like a bank? Yes! But there are some important differences to banking, on which we will come back later

• Non-interest income (39.5%): All commissions and fees clients pay for using the brokerage platform

  • For example, if you submit a buy order to Interactive Brokers, you pay a small commission to the company for executing this order

The company is active in almost 200 countries, but most of its revenue (69%) is generated in the US.

Interactive Brokers serves all types of customers. This ranges from individual investors to large hedge funds.

The best way to analyze a stock? Explore it yourself.

You can take a look at Interactive Brokers here.

2. Is management capable?

Thomas Peterffy founded the company in 1977. He arrived in the United States as a Hungarian migrant in 1965.

It’s great seeing Peterffy is still the Chairman.

Only 25.8% of the company is publicly held. The remainder is owned by IBG Holdings LLC, which is 91.4% owned by Thomas Peterffy and his affiliates.

This means we’re talking about an Owner-Operator Stock.

Milan Galik, the current CEO, took over the executive role from Mr. Peterffy in 2019. He has been with IBKR since 1990.

Many top leaders have been at the company for a long time. For example, the Vice Chairman joined in 1988, the CFO in 1987, and the Chief Information Officer in 1985.

3. Does the company have a sustainable competitive advantage?

Interactive Brokers has a wide moat based on cost advantages.

The company has an extreme focus on efficiency, technology, and automation. This leads to profit margins far exceeding those of competitors.

They also have something in common with Amazon that few other businesses have: An extreme customer focus.

How? It offers rates on cash reserves that exceed competitors’ rates by far:

• The company is very transparent to its customers regarding costs, in contrast to many other (online) brokers

• It doesn’t sell order flow to market makers, even though doing so could make the company more money in the short term. This choice saves customers money.

Companies with a sustainable competitive advantage typically show a high and strong Gross Margin and ROIC.

Interactive Brokers:

• Gross Margin: 90.7% (Gross Margin > 40%? ✅)

• ROIC: 22.4% (ROIC > 15%? ✅)

4. Is the company active in an attractive end market?

Interactive Brokers (IBKR) benefits from key trends in asset management.

First, global investment levels keep rising: almost $30 trillion is managed by mutual funds today.

Three major trends support IBKR’s growth:

1. More hedge funds: Assets in hedge funds grew from $118 billion in 1997 to over $5 trillion today. These funds use complex strategies that need advanced tools and data, exactly what IBKR offers with features like its option strategy builder and volatility lab.

2. More ETFs: The number of ETFs has exploded from 276 in 2003 to nearly 9,000 in 2022. These cost-sensitive funds often choose low-cost platforms like IBKR for trading.

3. More retail investors: In 2021, retail investors managed 52% of the global invested money. Many are under 35, tech-savvy, data-driven, and cost-aware — a perfect match for IBKR’s platform.

5. What are the main risks for the company?

There are three key risks to understand about Interactive Brokers.

1. Is IBKR a bank?

Some people consider Interactive Brokers a bank because they receive quite some interest income.

This can be seen as a risk since banks are greatly affected by interest rates.

The comparison makes sense, but some differences are important to keep in mind:

• Interest Rates: IBKR isn’t as affected by rising interest rates because it only invests clients’ cash in short-term assets.

• Leverage: Customers who want to borrow money to invest need to put up a lot of collateral.

• Assets: About 99% of IBKR’s assets are liquid, making a situation like Silicon Valley Bank's collapse unlikely when interest rates rise.

2. What to do when interest rates fall?

The graph below shows a connection between the average earnings IBKR gets from customer cash and the interest rate set by the central bank.

If interest rates fall, IBKR earns a little less from interest. Some analysts on Wall Street, who often think short-term, might lower their price targets and recommendations.

3. Future of the company’s management?

CEO Milan Galik (57) and Chairman Thomas Peterffy (79) might soon start thinking about who will succeed them.

Although no names are known yet, the company has a great track record of keeping people inside the firm for a long time and preparing them for further roles.

6. Does the company have a healthy balance sheet?

We look at three ratios to determine the healthiness of Interactive Brokers’ balance sheet:

• Interest Coverage: / (Interest Coverage > 15x? 🤷‍♀️)

• Net Debt/FCF: Net Cash Position equal to 43.6% (!) of Total Assets (Net Debt/FCF < 4x? ✅)

• Goodwill/Assets: 0% (Goodwill/Assets not too large? < 20% ✅)

Interactive Brokers has a very healthy balance sheet.

7. Does the company need a lot of capital to operate?

We prefer to invest in companies with CAPEX/Sales lower than 5% and CAPEX/Operating Cash Flow lower than 25%.

Interactive Brokers:

• CAPEX/Revenue: 0.9% (CAPEX/Sales < 5%? ✅)

• CAPEX/Operating Cash Flow: 0.6% (CAPEX/Operating CF? < 25% ✅)

As you can see, Interactive Brokers has a very low capital intensity.

Why is the CAPEX/Operating Cash Flow so close to the CAPEX/Revenue? Are Sales and Operating Cash Flow virtually the same?

Yes. This is because increases in client cash reserves are seen as operating cash flows.

Every time a client deposits money into their Interactive Brokers account, the company boosts its operating cash flow..

It compensates for all costs that are deducted from revenue to obtain profits.

8. Is the company a great capital allocator?

Capital allocation is the most important task of management.

Look for companies that invest shareholders' money at attractive rates of return.

Interactive Brokers:

• Return On Equity (ROE): 4.9% (ROE > 20%? ❌)

• Return On Invested Capital (ROIC): 22.4% (ROIC > 15%? ✅)

Interactive Brokers seems to be operating at a very attractive ROIC.

9. How profitable is the company?

The higher the profitability of the company, the better.

Here’s what things look like for Interactive Brokers:

• Gross Margin: 90.7% (Gross Margin > 40%? ✅)

• Net Profit Margin: 14.5% (Net Profit Margin > 10%? ✅)

Interactive Brokers’ profitability looks very attractive. They have a very scalable business model.

10. Does the company use a lot of Stock-Based compensation?

Stock-based compensation is a cost for shareholders and should be treated accordingly.

Preferably, we want SBCs as a % of Net Income to be lower than 4% and certainly below 10%.

Interactive Brokers:

• SBCs as a % of Net Income: 15.2% (SBCs/Net Income < 10%? ❌)

• Avg. SBC as a % of Net Income past 5 years: 32.5% (SBCs/Net Income < 10%? ❌)

Interactive Brokers uses a lot of Stock-Based Compensation. We will treat this as a cost in our valuation model.

11. Did the company grow at attractive rates in the past?

We look for companies that managed to grow their revenue and EPS by at least 5% and 7% per year, respectively.

Interactive Brokers:

• Revenue Growth past 5 years (CAGR): 22.0% (Revenue growth > 5%? ✅)

• Revenue Growth past 10 years (CAGR): 15.8% (Revenue growth > 5%? ✅)

• EPS Growth past 5 years (CAGR): 28.6% (EPS growth > 7%? ✅)

• EPS Growth past 10 years (CAGR): 24.6% (EPS growth > 7%? ✅)

These growth figures look attractive.

Another positive? The number of client accounts has been growing at a CAGR of 23% since 2008.

12. Does the future look bright?

You want to invest in companies that manage to grow at attractive rates, as stock prices tend to follow FCF per share growth over time.

Interactive Brokers:

• Exp. Revenue Growth next 2 years (CAGR): 5.1% (Revenue growth > 5%? ✅)

• Exp. EPS Growth next 2 years (CAGR): 5.7% (EPS growth > 7%? ❌)

• EPS Long-Term Growth Estimate: 10.5% (EPS growth > 7%? ✅)

13. Does the company trade at a fair valuation level?

We always use 3 methods to look at the valuation of a company:

• A comparison of the forward P/E multiple with its historical average

• Earnings Growth Model

• Reverse Discounted-Cash Flow

A comparison of the multiple with the historical average

The first thing we do is compare the current forward PE with its historical average.

Today, Interactive Brokers trades at a Forward PE of 22.0, the same as its 10-year average.

Earnings Growth Model

This model shows you the yearly return you can expect as an investor.

In theory, it’s easy to calculate your expected return:

Here are the assumptions I use:

• Earnings per Share Growth: 12.0% per year over the next 10 years

• Dividend yield: 0.5%

• Forward PE to remain flat

Expected yearly return = 12.0% + 0.5% + 0.0% = 12.5%

Reverse DCF

Charlie Munger once said that if you want to find the solution to a complex problem, you should invert. Always invert. Turn the problem upside down.

A reverse DCF shows you the expectations implied in the current stock price.

You try to determine for yourself whether these expectations are realistic or not.

You can learn more about a reverse DCF here: Reverse DCF 101.

For this model, we should use Net Income instead of Free Cash Flow, as client cash reserves are wrongfully taken into account for the Free Cash Flow.

The expected Net Income of the next 12 months equals $755 million.

We subtract the Stock-Based Compensation ($122 million) to arrive at FCF in year 1 of $721.5 million.

Today, IBKR has 108.9 million shares outstanding.

Under these assumptions, our Reverse DCF indicates that Interactive Brokers should grow its Net Income by 12.9% per year to return 10% per year to shareholders.

Interactive Brokers:

• Forward PE: 22.0x (lower than its 5-year average? < 22.0x? 🤷‍♀️)

• Earnings Growth Model: 12.5% (Yearly return > 10%? ✅)

• Net Income Growth Reverse DCF: 12.9% (Realistic growth expectations? 🤷‍♀️)

14. How did the Owner’s earnings of the company evolve in the past?

Over time, stock prices usually follow the growth in a company's Owner’s Earnings (EPS Growth + Dividend Yield).

That’s why we want to invest in companies that managed to grow their Owner’s Earnings at attractive rates in the past.

This is the case for Interactive Brokers:

• CAGR Owner’s Earnings (5 years): 29.3% (CAGR Owner’s Earnings > 12%? ✅)

• CAGR Owner’s Earnings (10 years): 25.1% (CAGR Owner’s Earnings > 12%? ✅)

15. Did the company create a lot of shareholder value in the past?

We want to invest in companies that have compounded at attractive rates in the past.

Ideally, the company has returned more than 12% per year to shareholders since its IPO.

Here’s what the performance of Interactive Brokers looks like:

• YTD: -13.5%

• 5-year CAGR: +28.8%

• CAGR since IPO (2007): +11.4% (CAGR since IPO > 12%? ❌)

The main reason IBKR hasn’t returned more than 12% per year since their IPO?

After the IPO in 2007, the share price needed a lot of time to recover from the 2008 Big Financial Crisis, only reaching its IPO level in 2015.

Since then, the stock has been picked up again, performing well above the market’s return.

Quality score

Finally, let’s bring everyhing together and give Interactive Brokers a Total Quality Score.

As you can see in the table below, Interactive Brokers gets a Total Quality Score of 7.9/10:

Everything In Life Compounds
Pieter (Compounding Quality)

👉 If you enjoy reading this post, feel free to share it with friends! Or feel free to click the ❤️ button on this post so more people can discover it on Substack 🙏

Tiny Compounders

I’m thinking about launching a new series called Tiny Compounders.

In this series, we identify Tiny Quality Stocks that have the potential to become large caps.

Think about Apple, which rose from $0.09 in 1985 to $198 today.

🤌 What? A series about Micro Cap Quality Stocks
🌎 Size? Invest in companies with a market cap < $500 million
🤷 For whom? Only Founding Partners of Compounding Quality can apply
📋 # of spots? Maximum 200 people will be allowed

Does this sound interesting? You can put yourself on the waiting list here:

Waiting List Tiny Compounders

Everything In Life Compounds
Pieter

Used sources

• Interactive Brokers: Portfolio data and executing all transactions

• Finchat: Financial data

Disclaimer

As a reader of Compounding Quality, you agree with our disclaimer. You can read the full disclaimer here.

The next company we’re adding to the Portfolio is a true Dividend Growth Stock—though even that might be selling it short.

It’s increased its dividend by over 20% per year for the past five years.
That’s not a typo.

The business is quietly dominant in its industry. It’s been around for over 70 years, building a huge economic moat - thanks to its scale, expertise, and regulatory advantages.

It’s extremely capital efficient.
It generates serious free cash flow… and gives much of it right back to shareholders.

And right now, it’s looking undervalued:

• It’s trading at a higher yield than its historical average

• The Earnings Growth Model points to an 11%+ expected return

• The Reverse Dividend Model says the market is pricing in less than half its historical dividend growth rate

This is the kind of business you can tuck away and let compound for decades.

Let’s go through the full investment case and prepare our trade for Monday.

Read more

Today we’re buying a fifth - this on is a pure Cannibal Company.

While it doesn’t pay a dividend, this company has been putting nearly 100% of its Free Cash Flow into Buybacks at very attractive valuations.

Subscribe now

Our Next Stock

Our next stock has a dominant market position, a strong history of growth, and new management that’s very shareholder friendly.

Other reasons we love this company?

• Solid Balance Sheet - the company could pay off its net debt with a few months of Free Cash Flow

• Lots of Cash Flow - the company has grown its FCF by 15% per year for the last decade

• Secular tailwinds - the company’s industry is expected to grow between 11% and 21% per year for the next 5 years

• Massive buybacks - the company has bought back more than 12% of shares outstanding in the last 2 years alone

• Attractive Valuation - the current P/E ratio is 65% lower than the 5-year average

• A conservative Earnings Growth Model says we can expect a 12% return

• Other methods predict up to 20% returns per year

Let’s dive into the full Investment Case and prepare our transaction for Monday.

Read more

Today we’ll announce the fourth.

Subscribe now

Our Next Stock

Our next stock is a Dividend Growth Stock that’s also High-yielder.

The best part?

The company has raised its dividend for 25 years, with a 5-year CAGR of 23.2%.

Other reasons we love this stock?

• Solid Balance Sheet - Low debt (30% Debt/Equity) and strong cash flow

• Owner-operator company, with one leader owning about $2 billion in shares

• The company is a low-cost producer of a necessary product

• It’s trading above the 5-year historical dividend yield

• A conservative Earnings Growth Model says we can expect an 11.3% return

• The Reverse DDM says the company needs to grow the divided at less than 25% of the 5-year historical rate to give us a 10% return

Let’s dive into the full Investment Case and prepare our transaction for Monday.

Read more

Today we’ll announce the third.

Our Next Stock

Our next stock is a High-Yield Stock selling at a discount.

It’s currently yielding over 8%.

That brings the average yield of our portfolio to over 4%.

• The company has very established brands - it’s been operating since 1902

• It is in an unpopular industry, and trades outside of the US

• It has a fast-growing segment that may provide tailwinds

• It generates lots of cash

  • Even with the high yield, the payout ratio is below 50%

  • Management has also initiated buybacks

• The company looks attractively valued:

  • It’s trading above its historic dividend yield

  • The Earnings Growth Model says we can expect a 13% return per year

  • The Reverse Dividend Model says it needs to grow the dividend at just over half its 5-year average rate for a 10% return.

Let’s dive into the full Investment Case and prepare our transaction for Monday.

Read more

Today we are announcing the second stock we’ll buy

Let’s walk our investment journeys together and build a great portfolio!

Portfolio Rules

Good agreements make good friends.

Because we are Partners, I will treat you just the same way I would like to be treated.

Here are the Portfolio Rules:

• You can follow the Portfolio 24/7 with 100% transparency

• REAL money is invested in the Portfolio (skin in the game)

• The portfolio will be based on a (fictional) amount of $1 million

  • For each company and transaction, you’ll see what percentage we’re investing

  • This way, you’ll understand our confidence in every company and transaction

• No front-running

  • Compounding Dividends will never buy a stock before you have the chance to do so (after doing your own research—please read the disclaimer

  • We’ll announce new transactions during the weekend, and they will be executed the next trading day (on Monday)

Our Next Stock

Our next stock is another Dividend Growth Stock, but this one comes with a twist:

It’s already yielding over 4%.

This means it qualifies as a high-yield stock.

• The company has a very established brand - it’s been operating since 1898

• It also has a very strong moat created by size, network effects, and cost advantages

• It generates lots of cash and returns a lot of it to shareholders

• The company looks attractively valued:

  • It’s trading above its historic dividend yield

  • The Earnings Growth Model says we can expect a 14% return per year

  • The Reverse Dividend Model says it needs to grow the dividend at half its 5-year average rate for a 10% return.

Let’s dive into the full Investment Case and prepare our transaction for Monday.

Read more

This means we will buy our first stock.

Let’s walk our investment journeys together and build a great portfolio!

Portfolio Rules

Good agreements make good friends.

Because we are Partners, I will treat you just the same way I would like to be treated.

Here are the Portfolio Rules:

• You can follow the Portfolio 24/7 with 100% transparency

• REAL money is invested in the Portfolio (skin in the game)

• The portfolio will be based on a (fictional) amount of $1 million

  • For each company and transaction, you’ll see what percentage we’re investing

  • This way, you’ll understand our confidence in every company and transaction

• No front-running

  • Compounding Dividends will never buy a stock before you have the chance to do so (after doing your own research—please read the disclaimer

  • We’ll announce new transactions during the weekend, and they will be executed the next trading day (on Monday)

First Stock

The first stock we’ll buy is a Dividend Growth Stock:

• The company has a beautiful franchise model that creates good returns for the parent company, and incentivizes the franchisees in all the right ways

• It has plenty of room to grow internationally

• The company has a strong loyalty program that has created a flywheel effect that will also allow the company to open a lot more US stores

• It’s trading above its historic dividend yield and has a history of intelligently buying back shares

Let’s dive into the 37-page Investment Case and prepare our transaction for Monday.

Read more