Accenture (ACN) is the type of high quality dividend growth stock I like to own in our Top 20 Dividend Stocks portfolio.

The company has raised its dividend every year since it began paying one in 2005, recording annual dividend growth greater than 20% during that time period.

Accenture’s dividend scores extremely high marks for safety and growth thanks to the company’s healthy payout ratios, excellent free cash flow generation, clean balance sheet, and proven durability.

Let’s take a closer look at Accenture as a potential investment opportunity for investors building a dividend portfolio.

Business Overview

Accenture is one of the largest professional services companies in the world and provides a range of end-to-end services and solutions in strategy, consulting, digital technology, and operations. Accenture develops and implements technology solutions to improve its clients’ productivity and efficiency.

The company was started in the 1950s and now serves more than 40 industries and delivers virtually every business function needed by its customers.

Accenture’s clients include 94 of the Fortune Global 100 and over 80% of the Fortune Global 500. Approximately 54% of Accenture’s revenue is generated from consulting with the remaining 46% from outsourcing activities.

By geography, North America is the company’s largest region and accounts for 47% of total revenue. Europe generates another 35% of revenue, and the remaining 17% are from growth markets such as Brazil.

By operating group, Accenture generates 25% of its sales from Products (consumer goods, retail, travel services, industrial, life sciences); 21% from Financial Services (banking, capital markets, insurance); 20% from Communications, Media & Tech; 18% from Health & Public Service; and 15% from Resources (chemicals, energy, utilities, natural resources).

Business Analysis

Accenture’s competitive advantages begin with its long operating history, wide range of services, and focus on developing its people.

The company has been in business for more than 60 years, which has given it the time needed to establish long-lasting customer relationships and build out its portfolio of skills and services.

The longer Accenture works with a client, the more ingrained it becomes in the client’s business processes and key strategic issues. As a result, switching costs are created that help with client retention.

For example, 97 of the firm’s top 100 clients have worked with Accenture for at least 10 years. The firm also owns one of the 50 most valuable brands in the world and is a trusted partner.

Few companies can match the breadth and reach of Accenture’s services, which is a requirement to serve large multinational clients. The company has offices in more than 50 countries around the world and is able to deliver end-to-end solutions virtually anywhere.

Accenture delivers its services through nearly 20 focused industry groups and consistently acquires smaller rivals to round out its services. The company has invested about $2.5 billion in nearly 40 acquisitions over its last three fiscal years to enhance its skills and gain scale in key growth areas such as digital.

As the pace of technological advancements accelerates, Accenture is becoming an even more important partner for its clients because it helps them be the digital disruptors rather than the disruptors.

From 3D printing, cloud computing, data analytics, and security to virtual reality and robotics, Accenture plays a leading role in helping its clients go more digital with their products and services.

Digital-related, cloud-related, and security-related services now represent close to 40% of Accenture’s revenue and are growing at a double-digit clip.

Accenture has a clear lead in the digital arena, which is fueling a lot of the company’s growth. For example, Accenture is the number one enterprise services provider for the cloud.

The company does cloud services for nearly 80% of the Fortune 100 and is the number one provider to all of the leading players in the ecosystem today such as Oracle, SAP, and Salesforce.

Above all else, Accenture is a human capital business. The firm’s services are provided by its people, and the company must differentiate based on its expertise and trust accumulated with clients.

To stay ahead of the pack, Accenture spends heavily on its employees. The company invested more than $800 million on training and development in fiscal year 2015. This is more than double the amount that Accenture invested in property and equipment and represented more than $2,000 per employee.

With over 375,000 employees, including thousands of PhDs, web developers, data scientists, digital marketers, and big data specialists, Accenture’s skilled workforce would be very hard to replicate – especially on a global scale.

As a capital-light business, Accenture also benefits from being able to adapt its business model somewhat more easily to changing conditions. The company can hire, train, or acquire new personnel to fill holes in its services portfolio and stay ahead of trends. This is much easier than retooling a large manufacturing factory.

Headcount can also be adjusted up or down based on the economy’s strength, helping Accenture better manage its profitability.

A final strength of the firm is its diversity. Approximately 80% of its revenue is derived from nine industry markets, and Accenture’s nine largest geographic markets also account for 80% of sales. The firm’s top 150 clients account for just over half of total revenue, too.

Simply put, Accenture is a very durable business with numerous intangible assets (e.g. brand recognition; skilled workforce; long-term client relationships) that make it hard to disrupt.

With that said, every business still faces risks.

Key Risks

Accenture believes that 25% of the world’s economy will be digital by 2020, up from 15% in 2005.

While the ongoing shift to digital is helping a large chunk of Accenture’s business today, it goes without saying that the digital revolution is causing many companies to face an unprecedented amount of change – including Accenture.

One example would be the rise of software-as-a-service (SaaS), which is taking market share from on-premise deployments of software.

SaaS deployments are smaller in size, which means less revenue available for parts of Accenture’s outsourcing business. IBM has certainly been caught off guard by a number of technological advancements (e.g. cloud computing), which have really hurt its business in recent years.

For now, Accenture’s core businesses have continued to grow. The company’s digital offerings have also done extremely well, but it’s worth keeping an eye on the impact technology changes could have on Accenture’s business model and long-term earnings power.

Besides technological changes, most of Accenture’s markets are extremely competitive. The company’s long-term future could be hurt if cheaper overseas competitors begin to pressure the industry’s pricing model or if clients move some of Accenture’s services in-house.

For now, I believe Accenture’s favorable competitive positioning remains intact.

Dividend Analysis: Accenture

We analyze 25+ years of dividend data and 10+ years of fundamental data to understand the safety and growth prospects of a dividend. 

Dividend Safety Score

Our Safety Score answers the question, “Is the current dividend payment safe?” We look at factors such as current and historical EPS and FCF payout ratios, debt levels, free cash flow generation, industry cyclicality, ROIC trends, and more. Scores of 50 are average, 75 or higher is very good, and 25 or lower is considered weak.

Accenture’s Dividend Safety Score of 100 suggests that the company’s dividend is one of the safest available in the market. The company’s payout ratios are one of the most important financial ratios supporting Accenture’s strong dividend safety.

Over the last four quarters, Accenture’s dividend payments have consumed approximately 40% of the free cash flow and earnings the company has generated.

As seen below, Accenture’s dividend payout ratios have increased over the last decade and hovered close to 40% in recent years. This is a healthy level because it provides plenty of room for future dividend growth and a nice margin of safety in case business fundamentals unexpectedly declined.

Source: Simply Safe Dividends

Source: Simply Safe Dividends

Besides payout ratios, a company’s recession performance is another important factor to consider when evaluating dividend safety. Cyclical companies that experience large swings in sales and earnings can be more vulnerable to future dividend cuts.

Accenture performed fairly well during the last recession. As seen below, the company’s sales only dipped by 8% in fiscal year 2009, and its operating margin remained resilient. The company’s stock also outperformed the S&P 500 by nearly 30% in 2008. Many companies did much worse than Accenture.

Accenture’s business performed relatively well throughout the recession because its services are needed by businesses through each stage of the economic cycle. As technology continues advancing, companies must continue investing in innovation and productivity to remain competitive.

Accenture can also help companies reduce their spending, save costs, and better align their operations for future opportunities.

Source: Simply Safe Dividends

Another factor supporting Accenture’s strong Dividend Safety Score is the firm’s consistent free cash flow generation. Without free cash flow, companies cannot continue paying dividends unless they issue debt or equity. I only invest in companies that consistently generate free cash flow, and Accenture is no exception.

Accenture has generated positive free cash flow each year for more than a decade, highlighting the quality of its asset-light business model. The company even grew its free cash flow per share each year during the last recession.

Source: Simply Safe Dividends

Analyzing a company’s return on invested capital is important because it provides clues about a company’s economic moat and ability to quickly compound earnings.

Businesses that earn high returns on invested capital create economic value and typically have a stronger ability to pay dividends.

Accenture’s business requires very little capital to run. As I mentioned earlier, the company spent more on training its employees last year than it did on purchases of capital equipment and property.

As seen in the chart below, Accenture’s asset-light business model has generated a superb return on invested capital over the last decade, highlighting its moat and ability to compound earnings.

Source: Simply Safe Dividends

Studying a company’s balance sheet is also critical to gain an understanding of its dividend safety. Businesses will always make debt payments before distributing dividends, and companies with too much debt can be at greater risk of dividend cuts if financial results unexpectedly deteriorate.

Accenture’s balance sheet is in fantastic shape. As seen below, the company has $3.5 billion in cash and practically no debt. It maintains investment grade credit ratings and could cover its current dividend payment for nearly three years just by using its cash on hand.

Source: Simply Safe Dividends

Overall, Accenture’s dividend is extremely safe. The company maintains healthy payout ratios, generates consistent free cash flow, earns strong returns, and has a rock solid balance sheet.

Dividend Growth Score

Our Growth Score answers the question, “How fast is the dividend likely to grow?” It considers many of the same fundamental factors as the Safety Score but places more weight on growth-centric metrics like sales and earnings growth and payout ratios. Scores of 50 are average, 75 or higher is very good, and 25 or lower is considered weak.

Accenture’s Dividend Growth Score of 96 suggests that the company has some of the strongest dividend growth potential in the market.

Accenture began paying dividends in late 2005, and the company has increased its dividend every year since then. With a 10-year dividend growth streak, Accenture is a member of the Dividend Achievers list.

As seen below, Accenture’s dividend growth has been excellent. The company’s dividend has increased by 21.6% per year over the last decade and grown at a double-digit annual rate over the last three years.

The company’s last dividend increase was an 8% boost in late 2015, and investors should be aware that Accenture pays its dividends on a semi-annual schedule.

Source: Simply Safe Dividends

Dividend growth over the next few years will likely sit in the mid- to upper-single digit range, tracking Accenture’s underlying earnings growth.

Management could grow Accenture’s dividend at a meaningfully faster rate considering the company’s practically debt-free balance sheet, $3 billion hoard of cash, stable business fundamentals, and healthy payout ratios near 40%.

Valuation

Shares of Accenture trade at a forward-looking P/E multiple of 21.6 and offer a dividend yield of 1.9%, which is somewhat lower than the stock’s five-year average dividend yield of 2.1%.

Accenture estimates that its market is growing close to 4% per year. Over the long run, it seems unlikely that Accenture would be able to grow much faster than the overall market given its existing large size (over $30 billion in annual revenue) and the law of large numbers.

If Accenture clocks in mid-single digit revenue growth over the long term, it seems reasonable to expect the company’s underlying earnings per share to grow at a somewhat faster pace – perhaps mid- to upper-single digit annual growth.

For comparison’s sake, Accenture’s earnings per share and free cash flow per share have compounded at 12.3% and 7.9% per year, respectively, over the last five years.

Under these assumptions, Accenture’s annual total return potential is approximately 8-11% (1.9% dividend yield plus 6-9% annual earnings growth).

The stock appears to be reasonably valued to me but certainly doesn’t look cheap either. High quality businesses rarely go on sale.

Conclusion

Accenture reminds me of some of my favorite blue chip dividend stocks. The company provides timeless services (consulting and outsourcing), benefits from its brand recognition and breadth of services, participates in extremely large and fragmented markets, and has a long runway for earnings and dividend growth.

Dividend growth investors should keep an eye on this high quality stock. While Accenture’s dividend yield is relatively low, the company’s long-term total return potential remains strong.