Dividend Kings In Focus Part 11: ABM Industries

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Dividend Kings In Focus Part 11: ABM Industries

Updated on October 1st, 2020 by Aristofanis Papadatos

ABM Industries (ABM) has an amazing track record when it comes to paying dividends to shareholders. ABM is part of the Dividend Kings, a group of stocks that have raised their payouts for at least 50 consecutive years. You can see all 30 Dividend Kings here.

We created a full list of all 30 Dividend Kings, along with important financial metrics such as dividend yields, payout ratios, and price-to-earnings ratios. You can download the full list by clicking on the link below:


Click here to download my Dividend Kings Excel Spreadsheet now. Keep reading this article to learn more.

Dividend Kings are the best of the best when it comes to rewarding shareholders with cash and this article will discuss ABM’s dividend, as well as its valuation and outlook.

Business Overview

ABM was founded back in 1909 and since that time, it has grown into an industry powerhouse. ABM Industries is a leading provider of facility solutions, which includes janitorial, electrical & lighting, energy solutions, facilities engineering, HVAC & mechanical, landscape & turf, and parking. The company employs more than 140,000 people in more than 350 offices throughout the United States and various international locations, primarily in Canada.

ABM counts hospitals, universities, public schools, data centers, manufacturing plants, airports and others among its long and impressive client list.

Source: Investor Presentation

The company’s expertise and many decades of experience in facility management has earned it a terrific reputation and thus it is a true industry leader. ABM Industries is headquartered in New York, NY, and is currently trading with a market capitalization of $2.5 billion.

ABM’s strategy is to compete in industries where it can win and that selection of customer bases is what you see above; ABM has learned through the decades where it can compete successfully and where it cannot and has focused its efforts accordingly.

ABM is a serial acquirer and the below image shows recent acquisitions and divestitures that have molded ABM into what it is today.

Source: Investor day presentation, page 8

In 2007 ABM’s revenue was about $3B, but it has more than doubled since then, currently standing at $6.5 billion. ABM has grown organically in part but the vast majority of its growth has been purchased. And given strategic direction from ABM in terms of future cash usage, we can expect more acquisitions as the years go on.

ABM also has an exceptional dividend growth record. The company has paid uninterrupted dividends for 217 consecutive quarters and has raised its dividend for more than 50 consecutive years.

Source: Investor Presentation

Given the remarkably low payout ratio of 35%, its decent growth prospects and its resilience to recessions, ABM is likely to keep raising its dividend for several more years.

One source of potential earnings growth going forward is international expansion as ABM entered the U.K. market with the GBM and Westway acquisitions in the past few years. Going forward, continue to look for lots of transactions from ABM in terms of both acquisitions and divestitures as it shifts its mix around further.

ABM is split into six segments that provide a wide array of facility solutions to its customers: Business & Industry, Education, Aviation, Technology & Manufacturing, Healthcare, and Technical Solutions. The company’s revenue streams are highly diversified, with janitorial services comprising the biggest single piece of the pie for ABM.

ABM is currently facing a significant headwind, namely the coronavirus crisis, which has caused a severe recession. In its fiscal third quarter, which ended on July 31st, ABM reported a 15% decrease in its revenue, primarily due to the impact of the pandemic on the aviation industry as well as schools. The aviation and education segments of ABM saw their revenues decrease 56% and 12%, respectively.

However, the company offset the effect of the pandemic thanks to a material increase in high-margin work orders related to the pandemic in its Business & Industry and Technology & Manufacturing segments and a drastic cut in its operating expenses, including labor costs. As a result, ABM enhanced its EBITDA margin from 5.6% in the prior year’s quarter to 7.9% and grew its adjusted earnings per share 25%, from $0.60 to $0.75, thus exceeding the analysts’ consensus by a wide margin ($0.33).

Due to the uncertainty that results from the pandemic and the possibility of new lockdowns, ABM did not provide guidance for the full fiscal year. Nevertheless, it is evident that the company is resilient to the pandemic, as it is poised to post record earnings per share this year. This will be an admirable achievement, particularly given that it will be the third consecutive year of record earnings per share for ABM.

Growth Prospects

ABM’s stated strategy is to grow by acquisition, as we saw above. That’s not to say that it is ignoring its ability to grow organically, however. When it has free cash flow to spend, it looks first at organic growth. The company has deep expertise and a great reputation here in the US for facilities management and looks to exploit that where possible. That means going after national accounts first where it can gain a significant amount of business all at once as well as centralizing support services to improve margins.

ABM also specifically calls out acquisitions in its strategy, although it is behind organic investments and the dividend. Still, ABM’s recent history suggests that acquisitions are a very important part of its overall strategy and thus, we can expect ABM will continue to grow via acquisitions as well as organically.

ABM is still extremely focused on the US market and that presents potential opportunities for further international expansion. ABM could use its significant expertise in facilities management to gain access to global clients around the world. The moves into the U.K. in recent years prove ABM is willing to take a chance and this may be the most significant growth avenue ABM has going forward. Keep in mind that the process to diversify away from the US has been slow thus far, but it is certainly worthy of investors keeping it on their radar.

A concern for ABM going forward is its margin profile. Before the latest quarter, which was marked by a steep increase in high-margin work orders, the EBITDA margin of ABM typically stood around 4%-5%. The businesses ABM competes in are high-volume but carry thin margins. ABM is providing what amounts to low-cost labor for its clients in most of its businesses, meaning barriers to entry are low for any particular account, especially at the local level.

ABM’s advantage, however, is in the scale it provides and it is focused at the senior management level on identifying and eliminating redundancies. Thus, margin growth is a potential avenue for earnings growth in the coming years as those efforts bear fruit, as they have done over the course of the current fiscal year. Overall, however, ABM’s growth is likely to be moderate given the structural headwinds to revenue and margin growth in the businesses it competes in. We expect 5% annual earnings-per-share growth over the next five years.

Competitive Advantages & Recession Performance

ABM’s competitive advantage is its size and the resultant economies of scale it enjoys. It has a 100+ year history of providing facility solutions for a wide array of customers and that expertise is what sets ABM apart. It is a true industry leader in the facilities management space and that affords it not only the ability to more easily attract new clients, but also to expand relationships with the ones it already has.

In addition, since ABM operates in low-margin businesses, smaller competitors are at a disadvantage in terms of leveraging down back office and support costs. ABM may be in some competitive lines of work but it is certainly better positioned than its competitors to overcome some of those obstacles. ABM Industries is one of the biggest companies in its industry, and its history of making acquisitions has enhanced its scale advantages further. It is likely that ABM Industries will continue to make acquisitions to increase its size further.

Recessions are painful for ABM just like any other company, but its performance during the Great Recession was remarkable. ABM’s earnings-per-share during the Great Recession are below:

ABM’s total revenue was higher in 2008 than it was in 2007 despite the nasty recession. That is due to the OneSource acquisition in 2007 as those results were added to the company’s top line in 2008, driving it higher. After that, revenue was slightly lower than 2008 in the next two years (but EPS rose) as ABM saw a diminutive negative impact to its top line from tough economic conditions.

Impressively, ABM grew earnings-per-share in each year of the Great Recession. Very few companies were able to accomplish this. Moreover, ABM has proved once again its resilient nature in the coronavirus pandemic. Thanks to an increase in high-margin work orders from resilient customers, ABM has easily offset the effect of the pandemic on its customers in the aviation industry and education. As a result, it is poised to grow its earnings per share to an all-time high level this year.

Overall, ABM enjoys thin operating margins and lackluster growth rates during normal economic times but it is exceptionally resilient during rough economic periods. This resilience is very important, as it supports the long-term returns of the stock and makes it easier for the shareholders to retain the stock during broad market sell-offs.

Valuation & Expected Returns

ABM is expected to generate record earnings-per-share of $2.10 in its fiscal 2020. As a result, the stock is currently trading at a price-to-earnings ratio of 17.1. This is slightly lower than the average price-to-earnings ratio of 17.5 for the stock in the past 10 years. We consider 17.5 to be a reasonable estimate of fair value for this stock.

That’s not a cheap valuation for a stock with low margins and low growth prospects, though the company has some long-term catalysts for earnings growth, including the low single digit rate of organic revenue growth mentioned earlier, as well as the margin improvement efforts ABM has already undertaken.

If the stock trades at our assumed fair valuation level in five years, it will enjoy a marginal 0.5% annualized gain in its returns thanks to the expansion of its earnings multiple.

Moreover, the stock is offering a 2.0% dividend yield. This yield is somewhat higher than the yield of the S&P 500 (1.6%) but it is still lackluster, particularly given the low growth rate of the company.

In addition, recent dividend raises have been very small, with typical increases in the 2% or 3% range. While ABM has an impressive history of paying dividends, it lacks both a high current yield and high rates of dividend growth.

ABM is likely to grow its earnings per share at a 5.0% average annual rate over the next five years. Combined with a 2.0% dividend and a 0.5% annualized expansion of the price-to-earnings ratio, total annual returns could approach 7.5% per year. This is not a spectacular expected rate of return, but is satisfactory for risk-averse investors seeking a reliable and resilient dividend growth stock.

Final Thoughts

ABM is certainly not a high-yield income stock, nor is it a high dividend growth stock. But what it lacks in excitement, it makes up for with consistency. ABM’s long and impressive history of paying a dividend should be respected, as the Dividend Kings are rare in comparison to the thousands of publicly-traded stocks in the market.

ABM’s organic growth is intact, and acquisitions add to growth. Growth from here depends upon potential international expansion as well as continued margin gains.

With a reasonable valuation and growth up ahead, total annual returns could be decent at 7.5% expected through the next five years. ABM is a Dividend King but it is not a stock to buy for a high dividend yield. Instead, it is a slow and steady dividend growth stock with resilient profits in a recession.

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