In an effort to diversify my dividend stock portfolio, today I wanted to review a company that would represent a new industry in my portfolio. The company is ABM Industries (ABM). ABM is a massive, diversified company that offers facility services ranging from janitorial services to HVAC services to parking. Of course, there are others, but that should give readers an idea of just how diversified the company is! In today’s analysis, we will review ABM, the company’s recent earnings release and run their metrics through the Dividend Diplomats Stock Screener to see if the company is considered an undervalued dividend growth stock. Based on our initial review, ABM is trading at a multiple in line with the marketplace and the company’s dividend growth has been subpar. Thus, I will pursue other investment options. But there was a lot of information and details to unpack for that conclusion. Let’s dive in.
In the introduction, we mentioned that ABM is a diversified, massive company. Here is a detailed description of the services offered per the company’s investor relations page:
ABM’s comprehensive capabilities include janitorial, electrical & lighting, energy solutions, facilities engineering, HVAC & mechanical, landscape & turf, mission critical solutions and parking, provided through stand-alone or integrated solutions. ABM provides custom facility solutions in urban, suburban and rural areas to properties of all sizes – from schools and commercial buildings to hospitals, data centers, manufacturing plants and airports.”
ABM employs over 140,000 people. That’s a lot of people!
ABM last reported earnings at the beginning of March. Within this earnings release, there was a lot of great information to read. Starting with the income statement, there was a very optimistic tone from management about the earnings release. Results were strong, organic revenue grew, operating profit grew as well compared to the same period last year. From a numbers standpoint, revenues increased 1.2% and operating profit increased 55.4%. The growth in operating profit was primarily attributed to increased organic revenue and a decrease in restructuring costs. Since companies are constantly restructuring (as it seems), I checked and saw that the restructuring costs related to a 2017 acquisition. Thus, in this circumstance, the costs should continue to show a decrease compared to last year as the acquisition and subsequent restructuring have been completed.
The results were looking good from an income statement perspective and I didn’t see any red flags in the company’s performance. The company continues to chug along and perform consistently. Just what we are looking for in a company in this sector. Now, I will move on to reviewing the company’s balance sheet. In the balance sheet analysis, I will review two metrics: the company’s debt and the company’s current ratio. Both are related, but we consider them important in review of the company’s balance sheet.
To assess the company’s debt, I will review the company’s leverage (or debt-to-equity ratio). As of 1/31/19, per the 10-Q, the company had a debt-to-equity ratio of .63X ($945.8m/$1,461.1m). This was compared to .62X last year ($902.0m/$1,454.6m). This is a pretty consistent ratio for the company.
There was one interesting note in the debt footnote of the 10-Q. Since the ratio was consistent, I was curious if the debt levels were concerning to management. Then I saw that the company’s line of credit includes a debt covenant that will prohibit the company from borrowing additional dollars if their leverage ratio exceeds 4.5X. The company’s current debt levels have a leverage ratio significantly below the threshold that would cause the company to violate their debt covenant. Based on this, I am not as concerned about the company’s debt levels at this time.
Lastly, let’s take a look at the current ratio. A current ratio of >1 indicates that the company has sufficient current assets to cover their short-term bills. We love a ratio that is greater than 1 for that reason. As of 1/31/19, the company’s current ratio was 1.54X ($1,231.1m/$798.0m). This is compared to 1.48X ($1,170m/$792.5m). Perfect, once again, a consistent metric that produces results that we like to see!
Dividend Diplomats Dividend Stock Screener
Now, it is time to put the company through the Dividend Diplomats’ Dividend Stock Screener. This is our simple stock screener that we use to determine if the company we are analyzing currently passes our investment filters used to identify undervalued dividend growth stocks. If a company passes our screener and a few other metrics, we will consider purchasing. Our stock screener uses three simple screens to identify the stocks: P/E ratio (valuation), dividend payout ratio (ability to continue growing their dividend), and their dividend growth rate/history of increasing their dividend (as we focus on companies that have demonstrated their ability to increase their dividend over a long period of time). Let’s see the results!
|Ticker||Price – 4/3/19||Forward EPS||Annual Dividend||Yield||Payout Ratio||5-Yr DGR||P/E Ratio|
**Sources: Pricing information, forward EPS, and annual dividend were obtained from Yahoo! Finance. The 5-year average dividend growth rate was obtained from Dividend Investing | Best Dividend Paying Stocks. The remaining figures in the table above were calculated by the author.
1) Dividend Yield: Typically, I look to invest in companies with dividend yields exceeding the S&P 500 yield of just under 2%. Otherwise, I would consider investing in a nice, diversified S&P 500 mutual fund, or ETF. ABM’s dividend yield is right in line with the broader market. This result is inconclusive.
2) Payout Ratio: We typically use a 60% threshold when reviewing a company’s payout ratio, as we believe this percentage point allows a company to continue to grow their dividend going forward without sacrificing the safety of their dividend. ABM’s dividend payout ratio is 36%, well below the 60% metric that we use. ABM passes, but I’ll discuss this further in the next bullet point.
3) Dividend History and Dividend Growth Rate: ABM is a Dividend Aristocrat. By the nature of this classification, ABM has a history of increasing their dividend. Awesome. Next, focusing on the dividend growth rate. Their 2.94% 5-year average dividend growth rate leaves something to be desired given the company’s lower dividend yield. If this were AT&T (T) or another high-yield dividend stock, I wouldn’t think twice about a low payout ratio. Further, with the company’s 36% dividend payout ratio, there is plenty of room to grow their dividend without sacrificing the safety. It seems like there is some dividend growth left on the table.
4) P/E Ratio: The final metric of our stock screener focuses on the current valuation of the company. I’m always looking for companies that are trading at a multiple below the broader market. Currently, the broader market has a historical P/E ratio in the mid-20x and a forward P/E ratio between 17x and 18x (per The Wall Street Journal). Right now, their 18.57X forward P/E ratio is right in line with the broader market.
The company’s operating results look great and consistent. Revenue growth is humming along and the company’s forward EPS will also grow at a consistent clip. With that being said, the consistent growth of revenue and EPS leads me to believe that the company’s less than stellar dividend growth will remain consistent as well. Unfortunately, for a company with a 2% dividend yield, I would like to have a much higher dividend growth rate. Further, the company is not exactly trading at a discount at this moment in time. Therefore, with everything considered, I am going to pass on investing in ABM at this moment in time.
What are your thoughts about ABM? Are you buying at this moment in time? Or, like me, are concerned about the company’s lack of dividend growth over the years?
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.