Fiserv Inc. (NASDAQ:FISV)

The period under review demonstrates a complex relationship between net operating profit after taxes, cost of capital, and invested capital, resulting in consistently negative economic profit. While NOPAT generally increased over the observed timeframe, it was insufficient to overcome the cost of capital applied to the substantial invested capital base.

Net Operating Profit After Taxes (NOPAT)

NOPAT exhibited an increasing trend from US$1,176 million in 2017 to US$1,797 million in 2021. This represents a cumulative increase of approximately 52.7% over the five-year period. The growth was not linear, with a more pronounced increase between 2018 and 2019.

Cost of Capital

The cost of capital decreased from 13.28% in 2017 to 11.78% in 2021. The decline was gradual, with a more noticeable reduction between 2019 and 2021. Despite this decrease, the cost of capital remained a significant factor impacting overall profitability.

Invested Capital

Invested capital experienced a substantial increase from US$9,201 million in 2017 to US$62,514 million in 2019. Following this significant rise, it decreased slightly to US$60,165 million in 2020 and further to US$59,700 million in 2021. The large increase in 2019 significantly impacted the economic profit calculation.

Economic Profit

Economic profit remained negative throughout the period, ranging from -US$46 million in 2017 to -US$5,234 million in 2021. The magnitude of the negative economic profit increased substantially from 2017 to 2019, coinciding with the large increase in invested capital. While the negative economic profit lessened slightly in 2020 and 2021, it remained substantial, indicating that the company’s returns were not sufficient to cover its cost of capital given its investment base.

The consistent negative economic profit suggests that, despite growing NOPAT, the company’s investments are not generating returns that exceed the cost of those investments. The large invested capital base appears to be a primary driver of this outcome, even with a decreasing cost of capital.

The analysis of the annual financial data reveals mixed trends in profitability measures over the five-year period ending December 31, 2021.

Net Income Attributable to Fiserv, Inc.

The net income shows some volatility throughout the years. From 2017 to 2018, it decreased slightly from 1246 million USD to 1187 million USD. A more significant decline occurred between 2018 and 2019, dropping to 893 million USD. However, this was followed by a modest recovery in 2020 to 958 million USD and a substantial increase in 2021 to 1334 million USD, surpassing the initial 2017 level. This pattern indicates a dip in profitability midway through the period, followed by a strong rebound in recent years.

Net Operating Profit After Taxes (NOPAT)

NOPAT displayed a consistent upward trajectory over the entire five-year span. It increased from 1176 million USD in 2017 to 1322 million USD in 2018, with further growth to 1565 million USD in 2019. This positive trend persisted in 2020 at 1728 million USD and reached 1797 million USD by the end of 2021. The steady rise in NOPAT suggests improving operational efficiency and profitability after taxes despite fluctuations in net income.

Overall, while net income faced a decline mid-period before a recovery, NOPAT steadily improved year-over-year, indicating strengthening core operating performance. The divergence between net income and NOPAT trends could be attributed to factors such as non-operating items, tax effects, or one-time charges influencing net income figures differently than operating profit metrics.

The financial data reveals varying trends in tax-related expenses over the five-year period ending in 2021.

Income Tax Provision

The income tax provision exhibits fluctuations without a clear linear trend. Starting at 158 million USD in 2017, it more than doubled to 378 million USD in 2018. This was followed by a significant reduction to 198 million USD in 2019 and stability around 196 million USD in 2020. In 2021, there was a notable increase to 363 million USD, approaching the 2018 level. This pattern suggests variability in taxable income, tax rates, or tax planning outcomes over the years.

Cash Operating Taxes

The cash operating taxes show a different pattern characterized by an initial decrease from 471 million USD in 2017 to 288 million USD in 2018 and a further decline to 255 million USD in 2019. In 2020, the figure rose slightly to 278 million USD, followed by a sharp increase to 775 million USD in 2021, which represents a nearly threefold jump compared to the previous year. This sharp rise in 2021 might reflect changes in operational profitability, tax timing differences, or alterations in cash tax policy or payments.

Overall, while income tax provision levels remained relatively volatile with peaks in 2018 and 2021, cash operating taxes demonstrated a steady decline until 2019, a minor uptick in 2020, and a significant surge in 2021. The disparity between the trends in provision and cash taxes in recent years may indicate differences in accrued versus actual cash tax payments, suggesting the influence of tax deferrals, credits, or adjustments impacting cash flow differently from the provision expense.

The financial data reveals several significant trends in the company’s capital structure and financial positioning over the five-year period.

Total reported debt & leases

The reported debt and leases displayed an increasing trend from 2017 through 2019, rising sharply from $5,266 million in 2017 to $22,642 million in 2019. This substantial increase indicates a significant leveraging or financing activity during that period. In 2020 and 2021, the reported debt & leases figures stabilized somewhat, with slight decreases and then a modest increase ending at $21,974 million in 2021, suggesting a relatively stable level of debt in the most recent years considered.

Total shareholders’ equity

Shareholders’ equity experienced a decline from $2,731 million in 2017 to $2,293 million in 2018, followed by a dramatic increase to $32,979 million in 2019. This surge aligns with the observed rise in debt, which may reflect an equity issuance, revaluation, or comprehensive income increase that boosted equity considerably. Subsequently, shareholders’ equity declined slightly but remained high at $32,330 million in 2020 and then decreased further to $30,952 million in 2021. Despite these decreases, equity levels remain substantially higher than the initial 2017-2018 amounts.

Invested capital

Invested capital followed a trend similar to that of total debt and shareholders’ equity. Beginning at $9,201 million in 2017 and increasing modestly to $9,909 million in 2018, it then surged to $62,514 million by the end of 2019. This jump reflects the substantial changes in both debt and equity levels noted previously. Despite the surge, invested capital slightly decreased in 2020 and 2021, ending at $59,700 million in 2021, suggesting moderate adjustments or repayments affecting the overall invested capital base during these last two years.

In summary, the data illustrates a period of significant capital restructuring or acquisition activity around 2019, characterized by sharp increases in both debt and equity components. Following this peak, the company maintained relatively stable but high financial leverage and equity levels, with minor declines in invested capital and equity in recent years. This pattern may indicate strategic investments or financing followed by a phase of consolidation or optimization of the capital structure.

The period under review demonstrates significant fluctuations in economic profit and the economic spread ratio. Invested capital exhibits an overall increasing trend, though with some stabilization in the later years. A detailed examination of these metrics reveals a complex performance picture.

Economic Profit

Economic profit begins at a loss of US$46 million in 2017, recovers to a marginal profit of US$3 million in 2018, and then experiences substantial losses in subsequent years. The losses escalate dramatically to US$6,065 million in 2019, then moderate slightly to US$5,662 million in 2020 and further to US$5,234 million in 2021. This indicates a consistent inability to generate returns exceeding the cost of capital throughout most of the analyzed period.

Invested Capital

Invested capital shows a clear upward trajectory from US$9,201 million in 2017 to US$62,514 million in 2019, representing a substantial increase. Growth slows considerably in the following years, reaching US$60,165 million in 2020 and US$59,700 million in 2021. This suggests a period of rapid expansion followed by a stabilization of capital deployment.

Economic Spread Ratio

The economic spread ratio mirrors the trend in economic profit. It starts at -0.50% in 2017, improves to 0.04% in 2018, and then declines sharply to -9.70% in 2019. The ratio remains negative, fluctuating between -9.41% in 2020 and -8.77% in 2021. The consistently negative values indicate that the company’s return on invested capital is less than its weighted average cost of capital. The slight improvement in the ratio from 2019 to 2021, while still negative, may suggest some mitigation of the underperformance, but substantial improvement is not evident.

The significant disparity between invested capital and economic profit suggests potential inefficiencies in capital allocation or operational performance. While invested capital increased substantially, the corresponding economic profit did not follow suit, resulting in consistently negative economic spread ratios. Further investigation into the drivers of these trends is warranted.

The economic profit margin exhibited significant fluctuations between 2017 and 2021. Initially negative, it briefly turned positive before declining substantially and remaining negative for the remainder of the observed period. A review of the underlying components reveals a complex relationship between economic profit and adjusted revenue.

Economic Profit Margin

In 2017, the economic profit margin was -0.80%, indicating a slight shortfall in generating returns exceeding the cost of capital. This margin improved considerably to 0.06% in 2018, suggesting a brief period of value creation. However, the margin deteriorated sharply to -58.51% in 2019, representing a substantial underperformance. While the margin improved somewhat in subsequent years, reaching -37.91% in 2020 and -32.10% in 2021, it remained significantly negative, indicating continued destruction of economic value.

Economic Profit

Economic profit started at -46 million in 2017, increased to 3 million in 2018, then experienced a dramatic decrease to -6,065 million in 2019. This trend continued with -5,662 million in 2020 and -5,234 million in 2021. The magnitude of the negative economic profit in later years is a primary driver of the consistently negative economic profit margin.

Adjusted Revenue

Adjusted revenue demonstrated a consistent upward trend throughout the period. It increased from 5,765 million in 2017 to 16,303 million in 2021. Despite this substantial revenue growth, the economic profit margin did not improve proportionally, suggesting that the cost of capital and/or operational inefficiencies are increasing at a faster rate than revenue.

The persistent negative economic profit margin, despite growing adjusted revenue, warrants further investigation into the factors contributing to the cost of capital and operational expenses. The substantial decline in the economic profit margin in 2019, coupled with the large negative economic profit, requires particular attention to identify the root causes of this underperformance.