ABM Industries: A Dividend King Improving Its Profitability And Dividend Growth Outlook

Dividend kings, companies with 50+ consecutive years of dividend growth under their belts, tend to be large, stable, and well-known businesses that are often a favorite among income investors.

However, occasionally small, lesser-known companies make it into this venerable group.

ABM Industries (ABM) is one example and has been a remarkably stable business over the decades.

The company’s management team is pursuing ABM’s largest ever corporate restructuring effort to further enhance the firm’s competitive position, too.

While ABM’s current dividend yield is below the yields offered by companies on our best high dividend stocks list here, ABM’s dividend growth profile could be set to improve with management’s restructuring plan.

Let’s take a closer look at this dividend king to see if it could be a good bet for long-term dividend growth investors.

Business Overview

Founded in 1909 in New York City, ABM Industries’ 100,000 employees serve over 20,000 corporate clients, both big and small, across over 300 offices in the US and in 20 international markets.

 

Source: ABM Investor Presentation

Essentially, ABM is a kind of corporate “handy man,” providing integrated solutions to a variety of logistical and mechanical engineering needs including energy solutions, HVAC (air conditioning), electrical systems, lighting, general maintenance and repair, as well as lawn care, janitorial, and parking services.

 

Source: ABM Industries

The company is currently undergoing its largest ever corporate restructuring that will result in six main business units which collectively represent $38 billion to $48 billion in global annual sales potential.

 

Business Analysis

A key factor to becoming a dividend king is a stable business model, as well as steady growth in sales, earnings, and free cash flow (FCF).

As you can see below, ABM Industries has a solid track record of steady top line growth, mainly due to large scale acquisitions in this highly fragmented industry.

 

However, the company has struggled somewhat to convert that acquisitive growth into higher returns.

In fact, while ABM’s adjusted EBITDA margin (management’s preferred profitability metric) has been flat over the past few years, its overall profitability and returns on shareholder capital have been headed in the wrong direction.

Companies that maintain a return on invested capital in the mid-single-digits typically have few competitive advantages.

In ABM’s case, it has larger size than most of its rivals and can offer customers a wider array of services to win their business, but contracts are usually awarded based on price because the services provided are undifferentiated and commoditized.

 

This has led to ABM generating below industry average profitability as well as poor EPS and FCF per share growth, which somewhat explains why management launched its Vision 2020 turnaround plan.

 

Source: Simply Safe Dividends

 

Sources: Morningstar, Gurufocus

Now in fairness to the company, a large reason that these metrics look so poor is because the company recorded substantial one-time charges that resulted in very poor GAAP earnings in 2016.

Specifically, the company recently changed its self insurance safety standards, which resulted in a $49.5 million one-time insurance cost last year. In addition, as part of the turnaround plan the company sold its government services business in 2016, thus incurring a $22.5 million writedown.

But what exactly is ABM’s Vision 2020 turnaround plan and what does it likely mean for the company’s future dividend growth prospects?

Basically, ABM management has realized that over the past decades it has acquired a lot of business units with poor moats, meaning they operated in rather commoditized businesses with little or no pricing power. Thus the three-phase Vision 2020 plan was launched in September of 2015.

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Disclosure: None. 

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