Accenture (ACN) is a high quality business that appears suitable for long-term dividend growth investors. The company has very sticky relationships with large global clients, generates significant cash flow with its asset-light business model, invests heavily to remain at the forefront of industry change, maintains a rock solid balance sheet, and appears to be trading at a reasonable valuation. With a Safety Score of 100 and a Growth Score of 79, ACN’s dividend is extremely secure and appears to offer 10%+ total return potential in future years for patient investors.
Business Description:
Accenture is a global management consulting, technology services and outsourcing company, providing end-to-end services to Global 2000 clients to help them transform and achieve tangible and measurable business results. Accenture’s clients span the full range of industries around the world and include 89 of the Fortune Global 100 and more than 75% of the Fortune Global 500. All of Accenture’s top 100 clients have been clients for at least five years, and 95 have been clients for at least 10 years.
Amassing these client relationships takes years of time as the work performed is sensitive to the client’s business and demands a meaningful level of comfort and trust with the service provider. Accenture delivers its services through 19 focused industry groups, allowing it to better develop industry expertise and deliver tailored solutions.
Sales Mix
By operating group: Communications / Media & Tech 20%, Financial Services 21%, Health & Public Service 18%, Products 25%, Resources 16%
By geography: North America 46%, Europe 35%, Growth Markets 19%
By type of work: Consulting 51%, Outsourcing 49%
Shareholder Value Creation Track Record:
The table below shows ACN’s total return over several periods. The stock has beaten the market nicely over each of these time frames and outperformed by 3.2% per year from 2010 to 2014.
Looking even longer-term, ACN has created meaningful value for its shareholders. The green line below shows ACN’s total return relative to the market, indexed to 100 in 2001. In other words, when the green line is rising, ACN is outperforming the broader market. It is clear that ACN has created significant value for shareholders over the past decade, but can it do the same over the next decade?
Dividend History:
Before we dig into ACN’s fundamentals, let’s review its dividend history. As seen below, the company has increased its dividend for nearly 10 years, compounding its dividend paid by 30% over the last five years. The dividend has increased every year since it was initiated in 2005.
While a growing dividend is a critical part of the total return equation, it is even more important that the dividend growth is sustainable. The payout ratio shows us what portion of a company’s earnings and free cash flow is paid out as a dividend. Lower payout ratios suggest the current dividend is safer and might have greater long-term growth potential. When a payout ratio rises, it means the company is growing its dividend faster than its underlying earnings or free cash flow.
Looking below, we see ACN’s EPS payout ratio has increased from 29% in FY10 to 41% in FY14. The company’s free cash flow (FCF) payout ratio has roughly tracked the EPS payout ratio in recent years, suggesting ACN’s earnings quality is high and the EPS payout ratio is an appropriate metric to analyze. With moderate sales and earnings growth expected to continue far into the future and a moderate payout ratio today, ACN seems to have a long runway to continue growing its dividend by 5-10% per year. I wouldn’t be surprised if ACN was a dividend aristocrat in 16 years.
Safety Score
Our safety score measures 20 fundamental factors covering a period of 10+ years to assess the safety of ACN’s dividend. It is measured out of a total possible score of 100 and accounts for the company’s performance during the financial crisis, the industry’s cyclicality, long-term and recent trends in growth and profitability, dividend growth track record, debt levels, stock price performance, free cash flow generation, company size, and more.
ACN achieved the highest ranking of 100, meaning it achieved a Safety Score higher than 99% of the other 2,250+ dividend-paying stocks we analyze. The company’s solid balance sheet, stable sales and earnings growth trends, consistent free cash flow generation, moderate payout ratio, commitment to dividend growth, and several other factors contributed to ACN’s stellar rating.
Growth Score
While the Safety Score is most concerned with the safety of a company’s current dividend, the Growth Score is all about a company’s potential to significantly grow its dividend in the years ahead. It assesses nearly 20 factors to gauge a company’s dividend growth potential, including EPS and free cash flow payout ratios, free cash flow generation, short and long-term sales and earnings growth trends, trends in return on capital, dividend growth track record, and more.
ACN’s Growth Score came in at 79, placing it in the top 21% of all dividend-paying stocks and suggesting it has a long runway to continue increasing its dividend. The company’s high return on capital, strong and consistent earnings growth, and moderate payout ratio contributed to its attractive rank.
Long-term Fundamentals
ACN’s asset light business model has enabled it to sustain very high returns over the past decade.
Revenue has grown at a 6% CAGR over the last seven years and a 5% CAGR over the past three years, demonstrating nice consistency. Sales also held up fairly well during the financial crisis, falling 8% in FY09 and remaining roughly flat in FY10. Results were helped by the usefulness of business consulting in each part of the economic cycle – helping companies cut back with their existing capabilities, align and position for future opportunities, and execute new strategies and major changes to operations.
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