Accenture: Compounder And Dividend Growth Stock

Introduction and summary:

I have been a shareholder in Accenture for many years and the only regret I have is that I don’t have a bigger position. Accenture is a stock I intend to own and add on meaningful pullbacks. Accenture is a mature company, but there is a lot to like about the business model: easy to understand, tailwind from inevitable digitalization, capital light and throws off a lot of cash. What’s not to like?

Up until now we can say the business model has been to hire people, rent office space, invoice the customers and pocket the difference. However, the business model has become a bit more complex during the last year due to their expansion into the cloud, cybersecurity etc.

The only minus with Accenture is lack of any significant ownership from the management. This is not an owner-operated company, like for example the much smaller Norwegian Bouvet ASA.

Summarized, my buy recap looks like this:

  • Inevitable digitalization – long growth runway. Accenture is more and more a tech company. The growth in IT-spending will continue for a long time.
  • Seems to have a good internal culture with little turnover of employees (relative).
  • Attractive workplace for employees. A magnet for young and hardworking people.
  • “Easy” and capital light business model. No debt, small net cash position.
  • Strong and long-term (sticky) relationships with its customers.
  • Always a market for “outsourced thinking”.
  • Margins have been steady for two decades.
  • Highly scalable.
  • Proven durability an resilience over many decades.

Consulting and outsourcing will always be in demand. Some organizations prefer to outsource their thinking (unlike Warren Buffett), and other companies simply lack both knowledge, flexibility, organization and manpower to do all tasks in-house. Besides, some fresh eyes might look at things differently than existing management.

The business:

Accenture plc, headquartered in Ireland but listed in New York (tickercode ACN), is perhaps the world’s leading organization in providing consulting, management, digital/interactive, technology and outsourcing services. The main goal is to increase the productivity of the client and services are provided globally.

Currently the business segments look like this:

  • Communications, media and technology
  • Financial services
  • Health and public service
  • Products
  • Resources

The segments are simply organized around the different groups of industries that Accenture serves. The segments use resources from several operating groups:

  • Accenture Strategy
  • Accenture Consulting
  • Accenture Digital
  • Accenture Technology
  • Accenture Operations

Accenture was formerly Arthur Andersen, which had two divisions: auditing and consulting. The auditing division went belly up after the Enron scandal, but Accenture, the former consulting division, has thrived since it was listed on NYSE in 2001. Since the listing the stock has compounded at 15% with dividends reinvested, a pretty remarkable performance for a huge and market leading company.

Accenture is becoming more and more a technology company. Its focus on growth technologies like cloud and cybersecurity has been the main driver of the increased turnover from 32 to 43 billion during the last four years. Cloud and cybersecurity represented 63% of revenue in 2019, up from 39% in 2016, and is expected to grow around double digits in the coming years. Its latest big acquisition, Symantec (bought from Broadcom), is a cyber security company.

 Some facts:

Segments turnover:
Revenue Operating margin
Communications, Media & tech 8 757 18
Financial services 8 494 15
Health and public services 7 161 10
Products 12 005 14
Resources 6 772 16
Geographic regions turnover:
North America 19 986
Europe 14 681
Growth markets 8 548
Type of work:
Consulting 24 177
Outsourcing 19 038

No heavy equipment or capital spending is needed to run the operations. It’s extremely asset-light. It’s a human capital business and the asset is the 492,000 employees who have deep knowledge in 40 different industries. This makes it a business quite hard to replicate, and also more adaptable than capital-intensive businesses.

The earnings have compounded at 13.5%, almost like clockwork:

Accenture historical EPS and free cashflow per share.

Because of multiple expansion the share price has risen more than earnings over the last decade.

Scale:

Accenture employs a massive 492 000 people as of fiscal 2019 (probably over 500 000 by now). It operates in 200 cities and 51 countries, it serves 75% of the Fortune Global 500 and 91 of the top 100. Of their 100 largest clients, 95 have been with them for 10 years or more. Accenture thus has massive scale compared to most competitors.

Scale is extremely important for consulting firms because of these reasons:

  • Network effect: Many consultants end up being permanently employed by the client. If they later need outsourcing services, they are most likely to go their former consultant – not an unknown company.
  • “Winner takes all”.
  • Consulting firms need to not only sell themselves to clients, but also to potential employees.
  • Multi-disciplinary projects (scope of services) are in demand and only a few companies can offer this as they are very difficult to execute. Remember that the main reason why clients hire consultants in the first place is due to lack of competence/manpower and organizational flexibility.
  • A good brand is important to attract both clients and employees. Potential employees are tempted by reputation, brand and scale, and likewise potential clients are much more likely to hire a known consultant than an unknown one.
  • Additionally, when you have scale you are more likely to retain a client, and don’t need to pitch new clients.
  • Scale creates barriers to entry for smaller competitors.

Capital light business:

The beauty of the business model is the very low requirement for working capital: 12% of the revenue ends up as free cashflow (operating margin is 14.5%) and only 1% is spent on CAPEX. Accenture has no long-term debt. On the contrary, the company is in a net cash position of about 5 USD per share, about 2.5% of the market cap. It’s worth mentioning that free cashflow has almost consistently been a tad higher than reported earnings.

Management and skin in the game:

The executives in the management team of the business units have been in Accenture for an average of 28 years. For a business that has a huge reputational risk this is very important. Almost all executives are recruited internally, which in my opinion reduces the downsides of being “agent-managed”.

One of the few negative things with Accenture is lack of any significant ownership from management and the board. The 24 people in the management and board own 635 000 shares, worth about 125 million USD, but still only 0.1% of the outstanding shares.

Capital allocations:

Accenture grows both organically and via many small bolt-on acquisitions. The first priority is to invest in the business, and secondly to return cash to shareholders (remember – no debt to pay back). Over the past three years, Accenture spent about $3.4 billion to buy 70 companies.

Almost all free cashflow is returned to shareholders, mostly via dividends and less via buybacks. Buybacks vary according to the discretion of the management and the board. The annual reduction in outstanding shares has been 1.3% over the last decade, a reduction from 787 million to about 640 million today. Less outstanding shares of course translates into EPS growth. Because Accenture throws off a lot of cash I believe the allocations make sense, and I would say Accenture is a pretty shareholder friendly company.

The current quarterly dividend is 0.8, annually 3.2, which gives a yield of 1.6%. This equals a payout ratio of about 40%. I expect the dividend to continue to grow for many years. The dividend growth (CAGR) has been 11% over the last decade.

The dividend history looks like this (per share):

2006 0.3
2007 0.35
2008 0.42
2009 0.5
2010 1.13
2011 0.9
2012 1.36
2013 1.62
2014 1.86
2015 2.04
2016 2.2
2017 2.42
2018 2.66
2019 2.92
2020 3.2

Valuation:

Accenture ends their fiscal year in August, thus the latest quarterly report are 2Q 2020 that ended 29th of February. 2Q showed an EPS of 1.91, a 10% increase from the previous year. Bookings were high: consulting bookings of $7.2billion and outsourcing bookings of $7.0 billion. However, this was before Covid-19 but I suspect the disruption from the virus is somewhat low. Nevertheless, an annualized EPS of about 8 gives a P/E of 25, not cheap by any standard and gives a low margin of safety. But considering the growth and the quality of the business I’m a buyer on any meaningful pullbacks in the share price. I added a little in March during the pandemic, in hindsight I should have bought more (hindsight is a beautiful thing…).

I anticipate little to no disruption from the pandemic long-term, even though management lowered their guidance for 2020 from 7% growth to 4.5%. On the contrary, I believe businesses will invest more into technology that enables employees to work from home, which should boost demand for many of the services of Accenture. For example, on the latest earnings call CEO Julie Sweet mentioned an example where a company wanted to implement communication tools for thousands of employees in just over a week.

Negatives/risk:

  • Accenture is big, growth will abate in the future.
  • Low barriers to entry. However, I believe relationships are quite sticky.
  • Talents in the IT world are in demand and costs money to hire.
  • Reputational risk.
  • The oil price has plummeted and this means oil companies cut a lot in CAPEX and spending. This will somewhat spill over to consultants.
  • Covid-19.

Conclusion:

Accenture is a premier company within its industry and offers services which “always” are in demand. The markets are still somewhat fragmented and the megatrend toward digitalization is inevitable. For those who are looking to invest in dividend growth stocks, Accenture should be a good candidate for investment, despite its low yield.

 

Disclosure: I am not a financial advisor. Please do your own due diligence and investment research or consult a financial professional. All articles are my opinion – they are not suggestions to buy or sell any securities.  

(This article was published on the 11th of June 2020.)

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