Accenture (ACN) provides management consulting, technology, and business process outsourcing services worldwide. It is organized in five segments – Communications Media & Technology, Financial Services, Health & Public Service, Products, and Resources. This international dividend achiever has paid dividends since 2005, and has increased them every year since then.
The company’s last dividend increase was in September 2013 when the Board of Directors approved a 15 % increase in the semi-annual dividend to 93 cents per share. The company’s peer group includes IBM (IBM) and Deloitte Consulting.
Over the past decade this dividend growth stock has delivered an annualized total return of 16.50% to its shareholders.
The company has managed to deliver a 15.50% average increase in annual EPS between 2003 and 2012. Analysts expect Accenture to earn $4.47 per share in 2014 and $4.95 per share in 2015. In comparison, the company earned $4.22 per share in 2013. Over the next five years, analysts expect EPS to rise by 10.14% per annum. The company has also managed to reduce the number of outstanding shares over the past decade from 997 million in 2003 to 715 million in 2013.
The consulting business is highly competitive. As a result, consulting companies need to differentiate themselves. In their 10-K, Accenture mentions the following on their differentiation:
“A key differentiator is our global delivery model, which allows us to draw on the benefits of using people and other resources from around the world—including scalable, standardized processes, methods and tools; specialized management consulting, business process and technology skills; cost advantages; foreign language fluency; proximity to clients; and time zone advantages—to deliver high-quality solutions. Emphasizing quality, productivity, reduced risk, speed to market and predictability, our global delivery model enables us to provide clients with price-competitive services and solutions. Our Global Delivery Network continues to be a competitive differentiator for us. We have more than 50 delivery centers around the world. As of August 31, 2012, we had approximately 162,000 people in our network globally.”
Overall I expect consulting to continue to be a growth business for years to come. Companies always need to fix or upgrade IT systems, solve strategic problems, cut costs, try to increase revenues or increase profitability. In addition, there might always be a need for companies to outsource certain tasks to providers like Accenture, in order to focus on their core competencies, thus creating a consistent revenue stream for the consultant. The core competitive advantage of the company is the stickiness of customer relationships. Once you get a client, and know its systems or processes, they tend to stay with you. That being said, maintaining client relationships is very important for companies like Accenture. Another advantage could be its strong brand name, which is synonymous with consulting in certain business circles.
Accenture has a very high return on equity, which ranged between 55% and 75%. This is mostly because the high value added professional services offered to customers do not come with a heavy capital investment requirements. I generally want to see at least a stable return on equity over time. I use this indicator to assess whether management is able to put extra capital to work at sufficient returns.
The annual dividend payment has increased by 28.70% per year over the past five years, which is slightly higher than the growth in EPS. This has been achieved mostly due to the expansion of the dividend payout ratio. Future dividend growth will likely be limited to earnings growth, which would likely be around 10% for the next five years.
A 29% growth in distributions translates into the dividend payment doubling almost every two and a half years on average. At a ten percent growth, distributions should double every seven years.
The dividend payout ratio has increased from 0% in 2004 to 38.70% in 2012. The company initiated a dividend payment in 2005, and had a low payout of 19%. Over the next eight years, Accenture has managed to increase distributions at a rate that was much higher than earnings growth, by expanding the dividend payout ratio. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.
Currently Accenture is attractively valued at 17.60 times earnings, yields 2.50% and has a sustainable distribution. However I find that IBM offers a better value today at 13.30 times earnings, despite the lower yield of 2%. As a result, I recently added to my IBM position. If I can purchase Accenture at 15 times earnings however, which is slightly above the average low P/E ratio over the past decade, I would initiate a position in the company.
Full Disclosure: Long IBM