As a dividend development investor, I continuously search alternatives to accumulate extra income-producing property to complement my dividend stream. Generally I add to my current positions, and on different events, I begin new positions in sectors and industries I lack publicity. The present volatility might supply a possibility to purchase extra property for enticing costs.
Essentially the most elusive sector for me was all the time the know-how sector. Firms on this section stored buying and selling for a excessive valuation because the Nasdaq broke yearly information. The present enterprise atmosphere has negatively influenced many tech shares, and I’m on the lookout for alternatives within the section. An thrilling prospect within the sector is Accenture (NYSE:ACN).
I’ll analyze the corporate utilizing my methodology for analyzing dividend development shares. I’m utilizing the identical methodology to make it simpler to match researched firms. I’ll look at the corporate’s fundamentals, valuation, development alternatives, and dangers. I’ll then attempt to decide if it is a good funding.
Searching for Alpha’s firm overview reveals that:
Accenture is an expert companies firm offering technique and consulting, interactive, trade X, music, and know-how and operation companies worldwide. The corporate affords software companies, together with agile transformation, DevOps, software modernization, enterprise structure, software program, and high quality engineering, knowledge administration, clever automation comprised of robotic course of automation, pure language processing, digital brokers, and software administration companies, in addition to software program engineering companies, technique and consulting companies, knowledge and analytics technique, knowledge discovery and augmentation, knowledge administration and past.
Revenues have elevated by greater than 100% over the past decade. Doubling gross sales over a decade equates to a roughly 7% annual enhance in gross sales. Accenture manages to extend gross sales each organically and thru M&A. A lot of the development is natural, as the corporate makes use of acquisitions to enhance its capabilities and worth proposition. Sooner or later, analysts’ consensus, as seen on Searching for Alpha, expects Accenture to continue to grow gross sales at an annual charge of ~6.5% within the medium time period.
The EPS (earnings per share) has elevated considerably sooner than the gross sales. During the last decade, the EPS has been up 172%. The sooner EPS development is because of gross sales development and improved margins. The corporate affords extra companies and options than its skilled companies, permitting it to enhance its margins as current purchasers require little expenditure. Sooner or later, analysts’ consensus, as seen on Searching for Alpha, expects Accenture to continue to grow EPS at an annual charge of ~8.5% within the medium time period.
The dividend might look a bit deceptive within the following graph. Accenture has been rising its annual dividend for 17 years, together with a 15.5% enhance in 2022. The decline within the dividend, as seen beneath, is as a result of the corporate shifted from paying a biannual dividend to a quarterly cost. The dividend is probably going secure because the payout ratio stands at 36%. The one drawback right here is the dividend yield which hovers round 1.5% following the dividend enhance.
Along with dividends, share repurchasing plans are the first methodology to return capital to shareholders. During the last decade, the variety of shares excellent remained nearly flat as Accenture purchased again 2% of its shares. The buybacks negate the issuance of recent shares as a part of acquisitions and worker compensation. Buybacks are environment friendly when the shares are low-cost, which isn’t the case with Accenture. Thus it is sensible to take care of the restricted buybacks.
The P/E (worth to earnings) ratio of Accenture stands at 26 when utilizing the ahead EPS estimates. It’s a excessive valuation in comparison with the final market, because the S&P 500 trades for roughly 16 occasions earnings. Nonetheless, the graph beneath reveals how the valuation decreased over the past twelve months. Regardless of the decline, the shares nonetheless appear to commerce for a premium.
The graph beneath from FAST Graphs amplifies that Accenture is buying and selling for a premium. Since 2017 the corporate’s share worth has indifferent from its valuation. The common P/E ratio of Accenture over the past twenty years was 20, which is considerably decrease than the present P/E ratio of 26. The valuation has improved, but there may be nonetheless some vital premium.
To conclude, Accenture is a improbable firm with nice fundamentals. We see how the corporate grows its gross sales and EPS. The corporate makes use of its money to reward shareholders utilizing each dividends and buybacks. Nonetheless, the present valuation appears to be excessive as the corporate trades for a better P/E than its historic common. The corporate should present vital development alternatives and restricted enterprise dangers to justify this valuation.
The corporate focuses on ten main choices, the place it sees essentially the most potential development for its prime and backside line. The corporate affords technological options and consulting because it helps firms enhance these central elements of their enterprise. Cloud migration and safety are important in nearly each trade, and provide chain is a scorching matter because the world offers with difficult delivery prices. The cloud and safety companies grew at 35% and 30% CAGR, respectively, over the past three years, and there may be nonetheless room to develop.
Diversification is one other key development alternative for Accenture. The corporate diversifies its enterprise into two axes: the geographical axis and the trade axis. The corporate’s worth proposition helps enterprise remodel and adapt to the brand new, ever-changing world. It’s a wanted providing throughout industries and geographies. Subsequently, Accenture would not depend on a single sector or nation to develop its enterprise, regardless of the U.S. being its main market.
Good M&A is one other vital development alternative for Accenture. Accenture continuously seeks and buys smaller firms that may widen its worth propositions for its shopper. When Accenture buys a small startup with a promising providing, it will probably later channel this new functionality and new providing to its whole shopper base. Subsequently, small acquisitions can have an effect on the enterprise.
The present enterprise atmosphere is riskier. There’s a larger degree of uncertainty, and economists imagine we could also be heading right into a recession. Throughout recessions, there may be stress on firms to restrict bills, and consultancies will undergo as there will probably be fewer tasks. Operational excellence tasks aiming for decrease prices are the main focus of extra conventional firms like McKinsey. Subsequently, a serious recession might have a big influence on Accenture.
Furthermore, a slight slowdown might considerably influence the corporate’s share worth. Whereas a slowdown might not have an effect on the basics closely, the corporate affords no margin of security on the present costs. Subsequently, even a slight downturn might scare buyers and result in a valuation that aligns with the corporate’s historic valuation. Thus, the shortage of margin of security is a danger from the buyers’ perspective.
One other danger for the corporate’s enterprise mannequin is the competitors. The corporate is competing with totally different consultancies for purchasers. Furthermore, some tech firms set up their deployment capabilities and like to deploy, set up, and supply companies themselves as they see the significance of proudly owning the connection with the tip shopper and customers.
Accenture is a good firm when its fundamentals and alternatives. The corporate’s gross sales development results in EPS development which fuels dividends and buybacks. The corporate has a lot room to develop because the demand for its companies will enhance in the long run, and it operates worldwide in lots of industries. Subsequently, there isn’t a doubt that it’s a high-quality firm.
Nonetheless, the corporate just isn’t low-cost, and this high quality trades for a premium. There isn’t a margin of security in case the dangers materialize, and Accenture will not carry out effectively. With no margin of security, buyers ought to select to build up shares slowly. I imagine that to develop into a powerful purchase, Accenture ought to commerce for round $230, which suggests a P/E ratio of 20. I feel it’s a BUY as a result of its wonderful prospects and its place as a market chief.