ABM Industries: A Recession-Resistant Dividend King

ABM Industries: A Recession-Resistant Dividend King

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 25 Dividend Kings here.

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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 a powerhouse of facility solutions with more than 130,000 employees, virtually all of which are in the US. The company competes in a wide variety of activities for its clients but it is most heavily involved in janitorial work. Below we can see the major categories ABM competes in and it is diverse; basically, if there is something a landlord or tenant needs, ABM can probably do it.

Source: FQ1 Earnings presentation, page 5

ABM counts hospitals, universities, public schools, data centers, manufacturing plants, airports and others among its long and impressive client list. The company’s expertise and many decades of experience in facility management has earned it a terrific reputation and it is a true industry leader.

ABM Building

Source: Investor day presentation, page 22

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.

ABM Acquisitions

Source: Investor day presentation, page 8

In 2007 ABM’s revenue was about $3B and today, it is more than double that amount. ABM has grown some organically 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.

One source of potential growth going forward is international expansion as ABM entered the UK market in earnest 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’s market cap is $2.4B today it is on track to do about $6.5B in revenue this year. It 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 and as I mentioned, janitorial services are the biggest single piece of the pie for ABM.

The current yield is 2% and recent dividend growth has been relatively tame, meaning ABM may not be the best choice for dividend investors in terms of current yield and growth.

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, as this slide from the company’s recent investor presentation shows.

ABM Investments

Source: Investor day presentation, page 58

Essentially ABM is saying that 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’s guidance for this year was for a rate of organic growth in the 3% range, which is a decent result. About half of ABM’s business is in fixed price contracts, meaning pricing growth on its own is very difficult to achieve; that’s a risk for ABM’s growth going forward.

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 currently has only ~4% of its workforce outside the US so it is just dipping its toes at this point. However, ABM could use its significant expertise in facilities management to gain access to global clients around the world.

The moves into the UK 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.

ABM Results

Source: Q1 earnings presentation, page 12

Above is an overview of the company’s recent Q1 earnings report and we can see not only ABM’s diversified revenue streams, but also its trouble with margins. ABM’s revenue growth figures look very impressive in Q1 as total sales rose a whopping 20%. However, only 3% of that was organic growth with the balance coming from acquisitions like GCA.

ABM will continue to grow revenue in the coming years but if it goes some time without a major acquisition, look for total revenue growth in the low single digits.

A concern for ABM going forward is its margin profile. Adjusted EBITDA was just 4.1% in Q1 but that did represent a significant improvement from the 3.6% it recorded in last year’s Q1. The businesses ABM competes in are high-volume but offer razor-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 finding and eliminating redundancies. Thus, margin growth is a potential avenue for earnings growth in the coming years as those efforts bear fruit, as they did in Q1. 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.

Competitive Advantages & Recession Performance

ABM’s competitive advantage is its size and scale. 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 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.

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:

  • 2007 earnings-per-share of $0.99
  • 2008 earnings-per-share of $1.10 (11% increase)
  • 2009 earnings-per-share of $1.33 (21% increase)
  • 2010 earnings-per-share of $1.34 (0.7% increase)

ABM’s total revenue was higher in 2008 than it was in 2007 despite the nasty recession we were experiencing. 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 in the next two years as ABM saw a diminutive negative impact to its top line from tough economic conditions.

EPS shows a slightly rosier path during and after the recession. ABM grew earnings-per-share in each year of the Great Recession. ABM provides what is essentially a staple service to businesses and thus, it isn’t something that can easily be cut in a recessionary environment. That leads to low margins and low rates of growth but strong recession performances like what we see above.

Valuation & Expected Returns

According to ValueLine, ABM is expected to generate earnings-per-share of $1.95 for 2018. As a result, the stock trades for a price-to-earnings ratio of 17.7. As you can see, the stock has held an average price-to-earnings ratio of 17.5 in the past 10 years.

ABM Valuation

Source: ValueLine

That’s not a cheap valuation for a stock with low margins and low growth prospects, but ABM’s recent acquisitions are providing some upside for revenue and earnings in the near term. Revenue is expected to be up close to 20% while earnings are expected to rise in the mid-teens, implying margins will fall this year despite the impact of tax reform on ABM’s effective rate.

Longer term there are catalysts for earnings growth including the low single digit rate of organic revenue growth I mentioned earlier, as well as the margin improvement efforts ABM has already undertaken. EBITDA margins in fiscal 2015 were in the mid-3% range while guidance for this year is more like the mid-5% area. That’s a significant amount of margin growth and that is the story for ABM going forward; acquisitions, a small amount of organic growth and the potential for incremental margin growth.

The dividend is worth a 2% yield at present, which means ABM is not a high-yield stock. In addition, recent dividend increases 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 payout growth.

That said, at the current valuation, ABM’s total returns could still be strong. EPS growth over the medium term is expected to be high. Combined with a 2% dividend, total annual returns could approach 10%.

Final Thoughts

ABM is certainly not a high-yield income stock, nor is it a dividend growth story. ABM’s long and impressive history of paying a dividend should be respected but it is clear the dividend is not the priority for management at this point. 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 returns could be fairly attractive from here. ABM is a Dividend King but it is not a stock to buy for a high dividend yield. It is a slow and steady staples provider with a reasonable valuation and strong recessionary performance.

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