Accenture PLC (ACN) Dividend Stock Analysis

Accenture plc 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 /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/share in 2013. Over the next five years, analysts expect EPS to rise by 10.14%/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

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Should Dividend Investors Ever Break Their Rules?

As a buy and monitor dividend investor, one of the items that is presented to me in brokerage statements is percentage gain on each one of my investments. I have noticed that the companies with the best total returns in my portfolio since 2008 included companies which did not exactly fit my strict entry criteria at the time of purchase. These companies were attractively valued at less than 20 times earnings at time of purchase, had adequately covered distributions and had strong earnings and dividends growth. The main criteria that these companies failed was low current yield at the time of purchase and sometimes a streak of dividend increases that was less than 10 years.

The one thing that all of these companies had in common, was the fact that they had the opportunity to deliver strong earnings growth. This strong earnings growth, was noticed by other investors, and led to increases in stock prices. It also didn’t hurt that the strong earnings growth trickled down to investors in the form of higher cash dividends as well. The reasonable price/earnings ratios I paid at the time of acquiring these securities enabled me to generate above average total returns while earnings were rising.  Because both earnings and dividends per share were growing rapidly, and because I was projecting that this could continue happening for the foreseeable 8 - 10 years, I was expecting to generate quite a nice future yield on cost within a decade.

The problem with these companies was that prices started moving up immediately after my purchase. Since these companies were purchased at attractive valuations however, and both earnings and dividends were increasing, substantial declines would have been a welcome opportunity to add to my position in these stocks.

Overall, whenever I “ignore” my entry rules, it is to acquire shares in a company, that is poised to deliver rapid growth. I still expect a rising dividend income stream, although I am willing to accept less than 10 years of dividend increases. In addition, I am willing to accept a dividend yield lower than 2.50%, if I believe that there is a potential for a strong earnings growth. In other words, if I purchase a stock yielding 1.50% - 2% today, which also grows earnings and dividends at 12%/year, I would expect to be earning an yield on cost of 4.50% - 6% in a decade. Ten or twelve percent growth rates per year are not unheard of, and could reasonably be expected to continue. As a result, the 1.5% -2% yielder purchased in year one, would likely still be generating a current yield 1.50% - 2% in ten years. However, if all goes according to plan, I would have tripled my money and earning a much higher dividend income stream.

The only crucial rule that I am not willing to bend is purchasing stocks at or above 20 times earnings. Paying more than 20 times earnings could result in serious losses if earnings do not deliver the expected growth over time. In addition, during bear market declines, high growth stocks tend to fall faster than the market as whole. As dividend investors, we are trained to see market declines as an opportunity to add more to our positions. In the heat of the moment however, losing 40% – 50% on a position could panic both inexperienced and experienced investors alike. In addition, paying too much for a company’s stock could lead to lower returns, even if it deliver the growth, if the market decides that it deserves a more reasonable multiple. An example of this occurred in the early 2000s, when even the most quality dividend stocks such as Johnson & Johnson (JNJ), Coca Cola (KO) and Wal-Mart (WMT) were trading at excessive valuations. This overvaluation was the primary reason for the so called “lost decade” for stocks.

The three stocks I bent my rules for included:

Family Dollar (FDO) had been yielding approximately 2% when I purchased it in 2008. Even during that turbulent time for stocks, the company had been performing impressively, by opening new stores and renovating existing ones to increase their appeal. Given the fact that Family Dollar stores are in smaller communities, and offer low prices to consumers, the financial crisis has been good for business. A consumer that wants to buy a loaf of bread is more likely to stop by a Family Dollar store rather than a Wal-Mart. And we all know that stopping by the store for a loaf of bread might expose consumers to buy something else in the process. I also used the weakness in early 2013 to increase my position slightly.

While I purchased shares of Visa (V) in 2011, I liked the long term growth potential for the company. In addition, Warren Buffett was buying Visa as well. Visa and MasterCard are essentially a duopoly that provides global consumers with the opportunity to do cashless transactions. While consumers would still use cash going forward, I would expect the number of credit and debit card transactions to increase over time not just in the US but globally as well. In fact, credit and debit card usage outside US is not as widespread. This could mean decades of growth for Visa and MasterCard. I also like the toll-booth like business model, where credit card issuers do not take on any credit risk, but simply process information. I purchased the shares at a yield of 1% and a P/E that was less than 20..

What attracted me to Yum! Brands (YUM) was the fact that it was rapidly expanding in China and had more room for future additions of capacity. McDonald’s had not been as successful in China as Yum! Brands, which is due to the fact that the operator of KFC offered something that appeals to the consumers better than burgers and fries. At the time of purchase, current yield was about 2%, although the company had announced plans to hike dividends significantly, and my forward dividend yield was 2.50%. I also used the declines in early 2013 to put another half position in the stock.

This pure dividend growth strategy is slightly riskier than the type where I purchase higher yielding stocks as well as companies in the sweet spot. That is why I only implement it in as one of the strategies in a broadly diversified dividend portfolio. For the three stocks mentioned above, I actually allocated a lower amount of capital than I would for a company like Johnson & Johnson (JNJ), in order to limit risk.

Full Disclosure: Long V, YUM, FDO, KO, WMT, JNJ

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Price is what you pay, value is what you get

In my dividend investing, I typically try to focus on the big picture. This means that in most cases I tend to ignore short-term fluctuation in stock prices. This is because short-term prices are usually driven by fear and greed, and might be totally out of line with the underlying fundamentals of a business for extended periods of time.

For example, during the global financial crisis, shares of Coca-Cola (KO) fell from a high of $32 in early 2008 to a low of $19 by early 2009. Nothing had changed fundamentally in the business however, as it earned $1.29/share in 2007 and $1.25 in 2008. Not surprisingly, people still wanted to have a few of their favorite drinks, even during a recession. Therefore, the underlying earnings power was still intact for this global franchise, and the company managed to keep increasing earnings to $1.47/share in 2009 all the way up to $1.97/share in 2012.  Investors who focused on the underlying fundamentals of the business, should not have been worried about the stock price declines in 2008 - 2009. The lower prices should actually be viewed as good entry opportunities.

This is why I focus my attention to understanding the fundamentals of the business I am monitoring. In general, I focus on businesses that sell a product or service that has a loyal customer base. As a result, I try to gain confidence in purchasing a business, whose products/services have lower chances of being obsolete in 10 – 20 years. This is very difficult to achieve, because there could be factors that are unknown today and would not be in my thought model, but which could derail my plan completely. For example, few investors would have expected that asbestos is so bad for people in the 1950s. However, it was bad for people, which led to poor performance by asbestos companies and a several bankruptcies in the US for companies in the industry.

However, if you find a collection of stable businesses you understand, which have durable competitive advantages, and you believe they will still be around in 20 years, you can add the shares if they are attractively valued. Monitoring such enterprises would involve reading annual reports, checking the financial figures there, and even quarterly filings to keep track of major developments throughout the year. Tracking every press release or analyst comment on a company you own however might result in information overload, which would actually be detrimental to your investment results. The thing that will make you the most money is rising earnings per share, which is why you need to focus on areas that could aid the company in achieving that.

In other words, I focus on the real earnings power and underlying assets per share of the company I am purchasing. Over time, this piece of information can provide much more value and wealth to me, than watching the stock price oscillate between a high and a low on a given year.

For example, I firmly believe that people would keep brushing their teeth with the brand of toothpaste they have been using in the past. If you monitor the toothpaste aisle on Wal-Mart (WMT), you can see plenty of consumers pulling their carts to the aisle, looking for their desired brand of toothpaste, and then proceeding on to the next item on the list. Since people are creatures of habit, chances are they would stick with a similar brand of toothpaste for years if not decades. People care about their teeth, and brush them even when there is a recession. Companies like Colgate-Palmolive (CL) sell millions of tubes of toothpaste to consumers throughout the highs and lows of the economic cycle. These millions of repeat purchases result in stable revenues and earnings streams for Colgate. The only problem is that the stock has been slightly overvalued in 2013.

The fact that I ignore short term price fluctuations does not mean that I ignore prices all the time. I only focus on them in relation to what I believe the value of a business should be. I usually achieve that by looking at price in relation to normalized earnings, after evaluating the earnings per share trends over the preceding decade. I then look at trends in returns on equity, revenues, dividends, payout ratios in this order. I use all of this information to estimate whether I have a good chance of receiving higher earnings and dividends over the next 20 years. I add all of this information to make a reasonable estimate of whether the value I am receiving is higher than the price of the company.

To paraphrase what famous investor Warren Buffett says “Price is what you pay, value is what you get”. My investment strategy is inspired by the Oracle of Omaha. Hopefully, this post serves to show that in order to be successful, you need to be able to pay a reasonable price for a sound business with attractive future prospects.

Full Disclosure: Long CL, KO, WMT

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What companies did I purchase over the past week: October 5, 2013 Edition

The past week was busy for me, as I made purchases for both my Roth IRA and taxable accounts. I purchased British Petroleum (BP) in the taxable and Roth IRA accounts. I also bought some IBM (IBM) and Altria (MO) in my Roth. This is in addition to the investment in Kinder Morgan from last week in the Roth. I try to tweet about those investments, and then review them on the site. After I make a few more investments in the Roth, I would likely post an article within the next one - two weeks. After I finish up making my Roth contributions in November however, I might start accumulating cash for my 2013 SEP IRA contribution. Therefore, unless the Government Shutdown creates 10 - 20 % drops in the stock market, I might not be making any sizeable purchases until sometime in 2014.

Next, I have highlighted a few interesting articles from the archives, which I find to be relevant today. The first few articles have been written and posted on this site, while the last five have been selected from other authors. I tend to post anywhere between three to four articles to my site every week. I usually try to write at least one or two articles that contain timeless information concerning dividend investing. This could include information about my strategy, or other pieces of information, which could be useful to dividend investors.

Below, I have highlighted a few articles posted on this site, which many readers have found interesting:

• Dividend Investing – Science versus Intuition
• Should I buy dividend stocks now, or accumulate cash waiting for lower prices?
• The importance of pricing and valuation in dividend investing
• Dividend Investors Should Ignore Price Fluctuations.

I read a lot about companies, and also read a lot of interesting articles from all over the web. A few that I really enjoyed in the past week include:

• Why We Are Dividend Growth Investors
• The ABC's of Dividend Investing
• Does Valuation Matter?
• Dealing With Investing Indecision
• The 10 Stealth Economic Trends That Rule the World Today

Thank you for reading Dividend Growth Investor site. As you can see, the best way to learn about my recent investments is to follow me on Twitter. This is because I might not post about them on my site for several days. If you can think of anything else I could cover, please do not hesitate to comment below. 

Do not despise the days of small beginnings

As a writer on a my website, I receive a decent amount of feedback from many readers through comments or emails. My recent article on the ten companies I purchased for my Roth IRA raised an interesting question. In the article, I had mentioned that it was better to invest $2000 in ten dividend paying stocks, rather than in just two.

My article was assuming that transactions costs can be maintained below 0.50%, and quality is not sacrificed. The question raised was whether it was worth it investing in dividend paying stocks at $200 per position.

The argument against investing $200 in dividend paying stocks was that the amount of the dividend would be so miniscule, that it would essentially not add any value to the investor. In other words, investing $200 at a time is probably not worth the effort.

I wholeheartedly disagree with this argument for so many reasons, that I decided to write a whole article about it.

1) The most important thing about dividend investing is to actually get started. That way, you get to put the power of compounding to your use for the longest time possible. If you put $200/month for 15 years in dividend paying stocks yielding 4% today, which raised dividends by 6%/year, and if you reinvested dividends over time, you would be earning $265 in monthly dividend income. While you would be earning $4 in annual dividends on the first purchase, after 15 years of persistent saving, investing and reinvesting, you would be generating more than what you are putting to work in your brokerage account. The power of compounding is strongest when you let your amounts work for you for long periods of time. To put it in perspective, if you put $200 at age 15, and let it compound at 10% for 70 years, you would end up with over $170,000 by your 85th birthday. Even after adjusting for 3% annual inflation, you still end up with close to $20,000 in inflation adjusted dollars.

2) The other reason is that one does not need a million dollars to get started with dividend investing. If you start with as little as $100 - $200/month, and you get to increase your contributions as your financial position improves, you have a very good shot of achieving your financial goals. Just by saving $100 - $200/month, you are ahead of most people in the US, who live paycheck to paycheck. Just remember that in order to reach your goal of financial independence, you would have to balance time to your goal, amount you put to work, and the investment return assumptions you are taking.

3) A third reason to start as soon as you have some money is because dividend investing is a cumulative learning process. When you start small, you can gain the knowledge on how to screen for dividend stocks, how to analyze them, how to select dividend stocks, and how to build and maintain a diversified income portfolio. You would also learn eventually not to panic during bear markets or not to get too excited when stock prices keep setting all time highs every single day. Those skills are highly scalable, meaning that if you know how to invest with $5,000, you also know how to invest with $5 million. For example, I spent several years learning about investing and paper trading, before putting actual money to work. I have found that you learn much more about investing, and the emotional side to it, when you have actual money on the line. Therefore, I would have been better off putting a few hundred dollars on the line, while paper investing.

4) A fourth reason to get started as early as possible is to experience the motivating factor of receiving passive dividend income. It is really refreshing to see your money work for you, and sending you a growing amount of dividends every quarter, no matter how small initially it is. I received my first “a-ha” moment when the first dividend payment hit my brokerage account several years ago. For the labor of identifying a dividend stock, and for the trouble of risking a small amount of funds on that idea, I was going to be paid a small but growing amount of income. I didn’t have to wake up at 6 o’clock, shuffle TPS reports all day long, deal with the eight levels of management above me, or get stuck in traffic for 2 hours/day to get my dividend payment. This dividend payment was also growing much faster than the salary raises most employees receive. Using this idea of dividends as a passive income source, I have been able to put every extra dollar to use in dividend growth stocks.

5) The fifth reason is somewhat of a repetition of everything from the previous four reasons. It is the story of Grace Groner, who was a secretary at Abbott Laboratories (ABT) who purchased 3 shares at $60 each in 1935. She then patiently reinvested the dividends for almost 75 years, until she passed away in 2010. At the time of her death, her investment was worth over $7 million, and throwing off over $300,000 in annual dividend income. If she had listened to the naysayers who would have told her that the dividend income from a mere $180 investment would be too low to be even worth doing, her estate would not have been able to leave millions of dollars to fund scholarships for generations of talented students.

6) Last but not least, putting a few hundred dollars to work per position might be a better alternative for most dividend investors, compared to making one or two large purchases per month. This applies to investors who build diversified portfolios of quality merchandise selling at attractive valuations over time, and who can maintain purchase costs below 0.50%. For several years i would buy stocks in $1000 - $2000 increments per position. Since I have 10 - 15 ideas at all times, this meant that I might wait for several months before I have the cash to buy more stock from ideas number 10 through 15. At that point, these ideas might be overvalued and no longer cost effective to buy. As a result, I would end up with plenty of companies which are a great long-term hold, although the positions are destined to remain low in proportion to my average portfolio positions.

By reducing purchase lot sizes, I increase my flexibility to add purchase shares in more than one – three companies per month. If I can keep commissions to below 0.50% overall, it is better to invest $2000/month in 10 companies than investing it in 2 companies.

Overall, in the past few weeks I have decided to start buying more than 1 – 3 positions per month, mainly by reducing my purchase size per position. I am essentially going to ramp up purchases in my Sharebuilder taxable brokerage account using their monthly plan for 12 transactions for 12 dollars. In addition, there are no additional fees to pay. Check my article on Best Brokerage Accounts for Dividend Investors.

The investments are made every Tuesday, and the stock prices I end up paying are very competitive. In my investing, I usually place the buy order in the morning before the stock market opens. I very rarely make investments during the day. With the likes of Zecco or Tradeking, I almost always managed to get filled at the open price. With Sharebuilder, I am actually getting a slightly better price in the aggregate. Of course, in the grand scheme of things, it doesn’t really matter if I paid $38.02/share for Coca-Cola (KO) shares using Sharebuilder, versus $38.27/share that I would have gotten with another brokerage. The most important thing is to look at the big picture, and not be carried away chasing pennies and losing dollars in the process. If my thesis is correct, 20 years from now Coca-Cola will trade anywhere between $120 - $160/share and pay over $4/share in annual dividends.

If I see a big drop in the stock of a company I am following and plan on purchasing, I might still purchase it in another account, especially if I believe that this is an opportunity that is short-lived. Sometimes, paying a $3 - $5 commission might make sense over a $1 commission, if it provides slightly more flexibility. After analyzing my investments however, I can attest that such purchases happen only 2 – 3 times/year.

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