Rudi’s View: Dicker Data (Stock In Focus)

This story features CSL LIMITED, and other companies.
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The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

In this week’s Weekly Insights:

-Dicker Data; Megatrends Without Covid-Lockdowns
-Ask FNArena

By Rudi Filapek-Vandyck, Editor

This week marks the end of fiscal 2025 (Monday June 30th) and yet another year of double digit return for the local market (as measured by the ASX200).

Below the surface, another regularly recurring phenomenon has equally come to its end; tax loss selling.

It’s a real thing, every year around late-May until the final day of June, but precisely how and where the impact is felt is very much determined by general market trends and conditions.

This year, the strong market performance has very much relied upon large cap Financials, with the banks in pole position, Growth stocks and the Technology sector, with miners (outside of gold), energy companies, staples and healthcare the notable laggards.

Equally important: small cap stocks without positive momentum remain in the unloved basket.

The share market can be as re-assuring and comforting as it can be frustrating when holding small cap laggards that keep on lagging.

Guess which stocks investors have been selling out from to reduce their tax liability? My guess is small cap non-performers have been the number one choice to be tossed overboard this year.

That said, it’s not by definition a clear cut proposition as some have also experienced bad news over the period and some share prices have started to recover already towards the end of the month (June).

The FNArena-Vested Equities All-Weather Model Portfolio owns three stocks that might well have been impacted over the weeks past with returns negative against a firm uptrend for the index and the portfolio overall; CSL ((CSL)), Woolworths Group ((WOW)), and Dicker Data ((DDR)).

All three have been held back for different reasons; all three are kept in portfolio ahead of better times to surely follow. The worst performer is Dicker Data. As a smaller cap proposition, this company is most likely the least well-known among investors.

Time for a general review and re-assessment.

Dicker Data; Megatrends Without Covid-Lockdowns

Most investor views and assessments are closely linked to how a share price performs. Dicker Data shares put in a strong performance between 2018 and early 2022, but that uptrend has since deflated.

Trading a little above $8, those shares are back where they were in late 2020, but also -47% below their all-time record high at $15 set in late 2021.

It’s a story/share price trajectory not dissimilar from many other small caps on the ASX. Many enjoy a few great years, but it seldom lasts as most find the transition from small cap into mid-cap too challenging; let’s not even mention graduating into the large cap section of the market.

So it’s fully understandable for investors to exhibit little patience and direct attention to share prices that are enjoying positive momentum. After all, who wants to be holding the next IDP Education ((IEL)) or Nufarm ((NUF))?

Dicker Data shares caught my attention back in 2023. The shares had fallen to a level comparable to where they are trading today, which looked genuinely undercooked as investors focused on economic uncertainty and preferred to jump on the new AI Megatrend.

Adding to the attraction was a relatively high dividend yield (circa 5.7%) which I believed was unlikely to be cut. Up until that point, Dicker Data was still seen as a small cap success story and shareholders had been pampered many times over since its IPO in 2011 at 20c.

Within weeks the decision to add the shares to the All-Weather Portfolio was well-rewarded with the shares rallying to above $12 from circa $8, but the trajectory since has simply pulled the price back to where it was; no doubt enjoying support from that juicy looking yield (and fully franked too).

Similar as with CSL and Woolworths, with the shares essentially not moving since the days of covid lockdowns, it would be easy to conclude this story has run its course. But there is a reason as to why I had included Dicker Data as part of my curated selection of Emerging New Business Models.

I thought there are reasons to believe this company is a higher quality operator in its sector. That thesis will be put to the test from here onwards.

One of the easiest indicators to underpin that higher quality label is the company’s profit margin which remains steadfastly above much larger international peers such as Ingram Micro. Dicker Data’s official label might be of a specialist IT hardware distributor, in practice its suite of services is a lot broader than that, also because its market focus (through resellers) is on smaller cap enterprises.

So whereas Ingram Micro and co compete for large volume contracts with the likes of Harvey Norman and JB Hi-Fi, Dicker Data assists smaller businesses with connecting to the cloud and getting their cybersecurity protection set up. These additional services are key to the higher margin the company enjoys.

That said, shifting PCs, printers, modems and CCTV cameras, along other pieces of hardware, remains the bread and butter core of the operation. This is where the post-covid hangover has impacted most. This is also one reason to be optimistic about the future as Microsoft is ceasing support of its Windows 10 operating system (from October onwards) and devices with built-in AI are gradually becoming the next must-have purchase.

Dicker Data believes its network of over 5000 resellers makes it the largest of its kind in Australia with an estimated market share of circa 50% (plus circa one third in New Zealand). Servicing clients with more complex needs allows the company to establish deeper, more value-add relationships, also including pre-sale technical support, training and credit facilities for resellers.

The provision of credit services is why the company tends to carry a large debt burden and why changes in interest rates have a rather large impact; they increase or decrease the costs for carrying so much debt. The early post-covid years have seen that burden increase quite rapidly, but now the RBA is taking the cash rate back to neutral, albeit in gradual steps, debt cost relief should follow.

The one factor that makes Dicker Data unique is it pays out 100% of its earnings or free cash flow to shareholders, paid out in quarterly installments, fully franked. This makes the shares equally attractive for your typical income-oriented investor (at least at current levels). Those dividends have not always grown year-on-year, but they have proven remarkably resilient over the past 15 years.

Starting from a cheap-looking valuation, underpinned by an attractive-looking yield, the investment thesis for Dicker Data shares could be summarised as the downturn in PC and hardware sales post-covid appears long in the tooth, while a renewed uptrend seems likely with Windows 10 about to be mothballed and with AI devices the new fashion. It’s not as if Harvey Norman, JB Hi-Fi and Wesfarmers’ Officeworks have not already flagged these prospects.

Demand for cybersecurity is equally a fresh Megatrend, as are cloud services and AI/analytics solutions and Dicker Data has the agreements in place, like with Nvidia, CrowdStrike, Azure, AWS, etc, to benefit from these trends too. As spending on software generally remains in an uptrend, such higher-margin sales become more important for Dicker Data too.

There is a danger of software companies eventually seeking direct-to-customer sales and circumvent the channel model through the likes of Dicker Data, but thus far that seems a tough call given the company’s importance in its core markets.

To date, selling more software through subscriptions only adds to the company’s annual recurring income.

Historically, lower interest rates tend to lead to improved consumer spending, albeit with a lag. History also suggests spending by smaller enterprises is closely correlated to consumer spending generally. From this perspective too, RBA rate cuts should improve conditions for spending by businesses overall.

While the colourfull David Dicker is no longer with the company, and he might even sell more of his equity whenever he feels like it, the daily running of the business is in hands of a leadership team that has been with the company for more than two decades, while co-founder Fiona Brown is still Executive Chair.

There’s a good argument to be made the business stagnation in recent years can be linked back to covid and lockdowns, a rare interruption for the industry and the company’s underlying trends. At the same time, expecting Dicker Data to resume its 20%-plus growth pace from the first decade post 2011 might also prove a bridge too far.

The company has grown into a $3bn-plus annual revenue company and adding new products and services, or even fresh acquisitions, simply no longer have that same impact. Plus, sometimes disappointment can show up via unexpected ways. In February, the half-yearly result actually surprised with a higher jump in sales, but one large AI contract weighed on the profit margin, and that’s all the market focused on.

I personally see Dicker Data as a less conventional way to have exposure to modern day megatrends including cloud computing and AI. While the share price has arguably lagged for much longer, and fallen much deeper than I believed it would, receiving quarterly dividend payments makes the waiting for the turnaround a lot easier.

Ultimately, the hangover from covid will wear off and we’re already three years-plus later. A prospect that is now equally brightening the outlook for the local healthcare sector, but that is a story for another day.

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See also my recent writings:

https://fnarena.com/index.php/2025/06/25/rudis-view-ten-years-of-all-weather-model-portfolio/

https://fnarena.com/index.php/2025/06/18/rudis-view-macquarie-technology-stock-in-focus/

https://fnarena.com/index.php/2025/06/11/rudis-view-the-ai-promise-is-broadening/

Ask FNArena

With fiscal 2025 in the rear view and the August results season only weeks away, FNArena is preparing for an online live event, allowing subscribers and investors to ask questions about what to expect, individual companies, specific strategies, et cetera.

Yours truly will do his best to prepare and answer as many questions as possible. No date has been set as yet, but we’re aiming for the final week of July.

Questions can be send in beforehand via Editor@fnarena.com. More details to follow.

Model Portfolios, Best Buys & Conviction Calls

This section appears from now on every Thursday morning in a separate update on the website. See Rudi’s Views for the archive going back to 2006 (not a typo).

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(This story was written on Monday, 30th June 2025. It was published on the day in the form of an email to paying subscribers, and again on Wednesday as a story on the website).

(Do note that, in line with all my analyses, appearances and presentations, all of the above names and calculations are provided for educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views are mine and not by association FNArena’s see disclaimer on the website.

In addition, since FNArena runs a Model Portfolio based upon my research on All-Weather Performers it is more than likely that stocks mentioned are included in this Model Portfolio. For all questions about this: contact us via the direct messaging system on the website).

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