Accenture (ACN) has raised its dividend every year since it began paying one in 2005, recording annualized dividend growth en excess of 20% during that time period.
With healthy payout ratios, excellent free cash flow generation, a clean balance sheet, and proven durability, Accenture is well-positioned to continue rewarding shareholders with strong dividend growth in the years ahead.
Furthermore, while the continued rise of the digital age is creating challenges for many companies, Accenture stands to be a beneficiary of many of these trends.
Let’s take a closer look at Accenture to see if this dividend growth stock looks attractive today.
Business Overview
Accenture is one of the largest professional services companies in the world and provides a range of end-to-end services and solutions in strategy, consulting, digital technology, and operations. Accenture develops and implements technology solutions to improve its clients’ productivity and efficiency.
The company was started in the 1950s and now serves more than 40 industries, delivering virtually every business function needed by its customers.
Accenture’s clients include 94 of the Fortune Global 100 and over 75% of the Fortune Global 500. Approximately 54% of Accenture’s revenue is generated from consulting with the remaining 46% from outsourcing activities.
By geography, North America is the company’s largest region and accounts for 48% of total revenue. Europe generates another 35% of revenue, and the remaining 17% is from growth markets such as Brazil.
By operating group, Accenture generates 26% of its sales from Products (consumer goods, retail, travel services, industrial, life sciences); 21% from Financial Services (banking, capital markets, insurance); 20% from Communications, Media & Tech; 18% from Health & Public Service; and 15% from Resources (chemicals, energy, utilities, natural resources).
Business Analysis
Accenture’s competitive advantages begin with its long operating history, wide range of services, and focus on developing its people.
The company has been in business for more than 60 years, which has given it the time needed to establish long-lasting customer relationships and build out its portfolio of skills and services.
The longer Accenture works with a client, the more ingrained it becomes in the client’s business processes and key strategic issues. As a result, switching costs are created that help with client retention.
For example, 98 of the firm’s top 100 clients have worked with Accenture for at least 10 years. The firm was a part of Forbes’ top global brands’ list for the sixth consecutive year and was also one of the top 25 companies on the Barron’s 500 list for the second year in a row.
Few companies can match the breadth and reach of Accenture’s services, which is a requirement to serve large multinational clients. The company has offices in 55 countries around the world and is able to deliver end-to-end solutions virtually anywhere.
Accenture delivers its services through around a dozen focused industry groups and consistently acquires smaller rivals to round out its services. The company has invested about $3.4 billion in nearly 70 acquisitions over its last three fiscal years (including $1.7 billion in fiscal 2017 itself) to enhance its skills and gain scale in key growth areas such as digital.
Some of its recent acquisitions include Cloud Sherpas, a leading cloud advisory and services provider; IMJ Corporation, one of Japan’s largest digital marketing agencies; and several European digital services companies.
As the pace of technological advancements accelerates, Accenture is becoming an even more important partner for its clients because it helps them be the digital disruptors rather than the disrupted.
From 3D printing, cloud computing, data analytics, artificial intelligence, and security to virtual reality and robotics, Accenture plays a leading role in helping its clients go more digital with their products and services.
Digital-related, cloud-related, and security-related services now represent close to 50% of Accenture’s revenue and are growing at a strong double-digit clip. Their share has continued to gain sharply from 40% of total revenues a year ago and 30% the year before.
Accenture seems to have a clear lead in the digital arena, which is fueling a lot of the company’s growth. For example, Accenture is the number one enterprise services provider for the cloud.
The company provides cloud services for nearly 80% of the Fortune 100 and is the number one provider to all of the leading players in the ecosystem today such as Oracle, Microsoft, SAP, and Salesforce.
Above all else, Accenture is a human capital business. The firm’s services are provided by its people, and the company must differentiate based on its expertise and trust accumulated with clients.
To stay ahead of the pack, Accenture spends heavily on its employees. The company invested more than $940 million on training and development in fiscal year 2016. This is almost double the amount that Accenture invested in property and equipment and represented more than $2,400 per employee.
With over 425,000 employees, including thousands of PhDs, web developers, data scientists, digital marketers, and big data specialists, Accenture’s skilled workforce would be very hard to replicate – especially on a global scale.
As a capital-light business, Accenture also benefits from being able to adapt its business model somewhat more easily to changing conditions. The company can hire, train, or acquire new personnel to fill holes in its services portfolio and stay ahead of trends. This is much easier than retooling a large manufacturing factory.
Headcount can also be adjusted up or down based on the economy’s strength, helping Accenture better manage its profitability throughout economic cycles.
A final strength of the firm is its diversity. Approximately 80% of its revenue is derived from nine industry markets, and Accenture’s nine largest geographic markets also account for close to 80% of sales. The firm’s top 150 clients account for around half of total revenue, too.
Simply put, Accenture is a very durable business with numerous intangible assets (e.g. brand recognition; skilled workforce; long-term client relationships) that make it hard to disrupt.
With that said, every business still faces risks.
Key Risks
Accenture believes that 25% of the world’s economy will be digital by 2020, up from 15% in 2005.
While the ongoing shift to digital is helping a large chunk of Accenture’s business today, it goes without saying that the digital revolution is causing many companies to face an unprecedented amount of change – including Accenture.
One example would be the rise of software-as-a-service (SaaS), which is taking market share from on-premise deployments of software.
SaaS deployments are smaller in size, resulting in less revenue available for parts of Accenture’s outsourcing business, which is witnessing a continuous decline (the company faces stiff competition from the likes of Indian outsourcers like Cognizant, Infosys, Wipro and TCS).
IBM has certainly been caught off guard by a number of technological advancements (e.g. cloud computing), which have really hurt its business in recent years.
While Accenture has arguably been a first mover in the digital space, other companies are fast catching up and making major investments in this area. Accenture also faces competition in its consulting area from the Big 4 consulting and audit firms such as Deloitte, KPMG, PWC, and E&Y.
These companies have similar industry capabilities and are making huge investments into digital capabilities such as analytics, cybersecurity, and automation.
Companies such as Facebook (FB) and Alphabet (GOOG) could also emerge as new rivals as they continue to control an increasingly massive pool of valuable data for businesses and consumers.
For now, however, Accenture’s core businesses have continued to grow. The company’s digital offerings have also done extremely well, but it’s worth keeping an eye on the impact technology changes could have on Accenture’s business model and long-term earnings power.
Besides technological changes, most of Accenture’s markets are extremely competitive. The company’s long-term future could be hurt if cheaper overseas competitors begin to pressure the industry’s pricing model or if clients move some of Accenture’s services in-house.
For now, Accenture’s favorable competitive positioning appears to be on solid ground.
Accenture’s Dividend Safety
We analyze 25+ years of dividend data and 10+ years of fundamental data to understand the safety and growth prospects of a dividend.
Our Dividend Safety Score answers the question, “Is the current dividend payment safe?” We look at some of the most important financial factors such as current and historical EPS and FCF payout ratios, debt levels, free cash flow generation, industry cyclicality, ROIC trends, and more.
Dividend Safety Scores range from 0 to 100, and conservative dividend investors should stick with firms that score at least 60. Since tracking the data, companies cutting their dividends had an average Dividend Safety Score below 20 at the time of their dividend reduction announcements.
We wrote a detailed analysis reviewing how Dividend Safety Scores are calculated, what their real-time track record has been, and how to use them for your portfolio here.
Accenture’s Dividend Safety Score of 100 suggests that the company’s dividend is one of the safest in the market. The company’s solid payout ratios serve as the first support of Accenture’s healthy rating.
Over the last four quarters, Accenture’s dividend payments have consumed 44% of the earnings and 35% of the free cash flow that the company has generated.
As seen below, Accenture’s dividend payout ratios have increased over the last decade and hovered close to 40% in recent years. This is a healthy level because it provides plenty of room for future dividend growth and a nice margin of safety in case business fundamentals unexpectedly declined.
Besides payout ratios, a company’s recession performance is another important factor to consider when evaluating dividend safety. Cyclical companies that experience large swings in sales and earnings can be more vulnerable to future dividend cuts.
Accenture performed fairly well during the last recession. As seen below, the company’s sales only dipped by 8% in fiscal year 2009, and its operating margin remained resilient. The company’s stock also outperformed the S&P 500 by nearly 30% in 2008.
Accenture’s business performed relatively well throughout the recession because its services are needed by businesses through each stage of the economic cycle. As technology continues advancing, companies must continue investing in innovation and productivity to remain competitive.
Accenture can also help companies reduce their spending, save costs, and better align their operations with future opportunities.
Another factor supporting Accenture’s strong Dividend Safety Score is the firm’s consistent free cash flow generation. Without free cash flow, companies cannot continue paying dividends unless they issue debt or equity.
Accenture has generated positive free cash flow each year for more than a decade, highlighting the quality of its asset-light business model. The company even grew its free cash flow per share each year during the last recession.
Studying a company’s balance sheet is also critical to gain an understanding of its dividend safety. Businesses will always make debt payments before distributing dividends, and companies with too much debt can be at greater risk of dividend cuts if financial results unexpectedly deteriorate.
Accenture’s balance sheet is in fantastic shape. As seen below, the company has $4.1 billion of cash on the balance sheet and practically no debt. It maintains investment grade credit ratings and could cover its current dividend payment for nearly three years just by using its cash on hand.
Overall, Accenture’s dividend is extremely safe. The company maintains healthy payout ratios, generates consistent free cash flow, earns strong returns, and has a rock solid balance sheet.
Accenture’s Dividend Growth
Accenture began paying dividends in late 2005, and the company has increased its dividend every year since then. With a 10-year dividend growth streak, Accenture is a member of the Dividend Achievers list.
As seen below, Accenture’s historical dividend growth has been excellent. The company’s dividend has increased by approximately 21% per year over the last decade and grown at a double-digit annual rate over the last five years.
The company’s last dividend increase was a 10% boost earlier this year, and investors should be aware that Accenture pays its dividends on a semi-annual schedule.
Dividend growth over the next few years will likely sit in the upper single-digit range, tracking Accenture’s underlying earnings growth.
However, if management wanted to, they could probably grow Accenture’s dividend at a meaningfully faster rate considering the company’s practically debt-free balance sheet, $4 billion hoard of cash, stable business fundamentals, and healthy payout ratios near 40%.
Valuation
Shares of Accenture trade at a forward P/E ratio of 21.3 and offer a dividend yield of 1.9%, which is somewhat lower than the stock’s five-year average dividend yield of 2.1%.
Accenture estimates that its market is growing close to 4% per year, while the company is growing faster than its peers.
Over the long run, it seems unlikely that Accenture would be able to grow much faster than the overall market given its existing large size (over $30 billion in annual revenue) and the law of large numbers.
If Accenture clocks in mid-single-digit revenue growth over the long-term (the company is expecting 5%-8% growth in revenues in fiscal 2018), it seems reasonable to expect the company’s underlying earnings per share to grow at a somewhat faster pace – perhaps mid- to upper single-digit annual growth (and EPS growth of 8%-12% in fiscal 2018).
For comparison’s sake, Accenture’s earnings per share and free cash flow per share have compounded at 13.7% and 6% per year, respectively, over the last five years.
Under these assumptions, Accenture’s annual total return potential could be between 9% and 11% (1.9% dividend yield plus 7% to 9% annual earnings growth).
Overall, the stock appears to be somewhat reasonably priced for long-term dividend growth investors but certainly doesn’t look like a bargain. High quality businesses rarely go on sale.
Conclusion
Accenture provides timeless services (consulting and outsourcing), benefits from its brand recognition and breadth of services, participates in extremely large and fragmented markets, and has a long runway for earnings and dividend growth thanks to its material exposure to digital-related, cloud-related, and security-related services.
Dividend growth investors should keep an eye on this high quality stock. While Accenture’s dividend yield is relatively low, making the stock less appropriate for income investors looking for the best high dividend stocks, the company’s long-term total return potential remains solid.
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