Insatiable Acquisition Machine Accenture – Buyback Wednesdays

Accenture plc (ACN): $306.23

Market Cap: $193.17B

EV: $188.03B

Key Insights

• Accenture is an insatiable acquisition machine, acquiring 165 companies over the last five years and yet maintaining a pristine balance sheet with nearly $9 billion in net cash.
• The company has a massive employee count of 733,000 and a wide geographic footprint across 49 countries.
• Offsetting dilution caused by stock-based compensations seems to be the major reason for the huge share repurchases initiated by the company.
• The company’s recent allocation of $3 billion for AI initiatives is substantial.
• A decline of 10% in new bookings in Q4 FY2023 ended August 2023 reflects poorly on future growth prospects

Based in Dublin, Ireland, Accenture plc (ACN) is an Irish-American digital consultant, specializing in information technology services and consulting. It helps businesses achieve their strategic objectives through digital transformation with operations across 49 countries

Accenture’s current clients include 91 of the Fortune Global 100 and more than three-quarters of the Fortune Global 500. Accenture has a larger presence in Europe and the United States compared to other regions. As of 2022, Accenture is considered the largest consulting firm in the world by number of employees with about 733,000 employees worldwide.

Accenture has been consistently outperforming the S&P 500 over the last 10 years. The share price is up 15.6% over the last year and 13.3% this year.

On September 28, 2023, the board of the company authorized an additional $4 billion share repurchase program that represents around 2% of its market cap at announcement.

Acquisitions

Accenture has pursued an aggressive acquisition strategy to broaden its service offerings, having acquired a total of 165 companies in the past five years. While many of these acquisitions involve smaller firms, their collective contributions have been substantial. In 2022, the company made 25 acquisitions worldwide, including Barcelona-based Alfa Consulting, Argentina-based Ergo, Brussels-based Greenfish, and Minnesota-based The Stable.

Artificial Intelligence

Accenture is rapidly taking a leadership position in AI. Last quarter, the company booked 100 AI projects with roughly $100 million in sales. Demand accelerated in fiscal Q4 2023 with another approximately $200 million in AI sales, bringing the total to over $300 million for the year.

Accenture has also embedded AI across its service delivery approach, driving efficiency and accelerating value for thousands of clients through its market leading platforms such as myWizard, SynOps, and MyNav.

Dividends

Accenture has consistently paid dividends without interruption and has steadily increased them since 2005. It has increased its quarterly dividend from $0.8 per share in October 2019 to $1.12 per share in August 2023.

In August 2023, the company paid its fourth quarter cash dividend of $1.12 per share for a total of $706 million and also increased its next quarterly dividend to $1.29 per share to be paid to shareholders on record as of October 11, 2023, a 15% increase over the previous quarter.

A forward dividend yield of 1.67% may seem small, but it is important to note that with a payout ratio of 41.04%, the dividend is sustainable, stable, and growing, with room for future increases.

Profitability

The company has maintained fairly stable gross and net margins over the past five years. Its current net margin is 10.72%, and the return on equity for the trailing twelve months is an impressive 28.75%, both significantly exceeding the sector’s median figures.

Capital Allocation 

In 2022, Accenture deployed over $2.5 billion across 25 acquisitions, $1.3 billion in R&D assets, platforms, and industry solutions, and $1.1 billion invested in the training and development of its people. In the fourth quarter of 2023, Accenture repurchased 3.2 million shares for $1 billion at an average price of $312.35 per share.

Share Repurchases

Accenture has announced share repurchases consecutively for three years, announcing $3 billion in additional buybacks each in 2021 and 2022, representing 1.3% and 1.8% of their market caps at announcement respectively. During the fourth quarter of fiscal 2021, the company purchased 2.9 million shares under this program for an aggregate price of $891 million.

However, the shares outstanding count has shown only a slight decline in 4 years, reducing from 649.3 million in May 2019 to 638.7 million in May 2023, indicating that the company has retired only 1.63% of its outstanding shares over the last 4 years. This suggests that these share repurchases are mostly initiated to offset the dilution caused by stock-based compensations offered by the company.

Valuation

Accenture appears overvalued with a forward P/E of 26.14 and forward EV/EBITDA of 15, well above the average sector median. This higher valuation suggests that the stock is relatively expensive, underscoring the market’s strong confidence in the company’s prospects.

Balance Sheet and Cash Flow

Accenture has a strong balance sheet with no debt at all. Instead, it had net cash of $8.9 billion as of August 2023, an increase of $1.06 billion from last year. The value of its assets is nearly twice that of its liabilities, and its short-term assets exceed short-term liabilities. Its debt-free balance sheet is surprising given the number of acquisitions made by the company, especially in the last 5 years.

The company has consistently witnessed a gradual uptick in its free cash flow, currently reaching $9 billion. The company has ample financial resources for internal investment and potential acquisitions, all without relying on external financing.

Considering the company’s robust free cash flow, the announcement of a substantial $4 billion buyback program by the company appears to be a prudent decision.

Q4 FY2023 Results

Coming off two fiscal years of double-digit growth and a strong FY 2022, Accenture had to navigate a macro environment that was tougher than anticipated at the beginning of FY 2023. The company witnessed greater caution globally, with lower discretionary spending, slower decision-making, and a significant impact from the challenges the communication, media, and tech industries have faced.

Source: BusinessWire

Free cash flow for the quarter was $3.2 billion, resulting from cash generated by operating activities of $3.4 billion, net of property and equipment additions of $180 million.

Taking a closer look at its service dimensions for the quarter, technology services grew mid-single-digits, operations grew high-single-digits, and strategy and consulting declined mid-single-digits.

Full Year Results

• New bookings were $72.2 billion for the full year, a 1% increase in U.S. dollars and 5% increase in local currency over full-year fiscal 2022 new bookings.
• Accenture now has 300 Diamond clients, up by 33 from last year. These are clients who seek large-scale transformation services from the company.
• Revenue was $64 billion for the year, representing 8% growth in local currency, while continuing to take market share.

Source: Accenture

The company has exceeded revenue and earnings expectations in 7 out of the last 8 quarters.

FY 2024 Outlook

Accenture’s FY 2024 guidance is conservative compared to pre-Covid levels, where the company aimed for 5-8% revenue growth. The company attributes this cautious outlook to client hesitance, primarily stemming from a deceleration in technology spending. Clients are presently giving precedence to cost-reduction initiatives, and there is minimal demand for discretionary services.

In terms of specific business segments, Accenture anticipates low-to mid-single digit growth in consulting and mid-to high-single digit growth in managed services for FY 2024. Accenture expects revenue growth of 2% to 5% in local currency; GAAP diluted EPS of $11.41 to $11.76, a 6% to 9% increase; and adjusted EPS of $11.97 to $12.32, a 3% to 6% increase.

Risks 

• Economic recessions or downturns can lead to reduced client spending on consulting and technology services, affecting Accenture’s revenue and profitability.
• Intense competition can lead to pricing pressures and the need to continuously innovate to maintain a competitive edge.
• Attracting and retaining top talent is crucial in the consulting and technology industry. High turnover or difficulty in recruiting skilled professionals can impact project delivery and client satisfaction.

Bottom Line

Accenture looks attractive with no debt, ample free cash flow to fund its acquisitions, significant market share and strong profitability. The company also rewards shareholders through share repurchases and dividends on a regular basis.

Growth has slowed down in recent quarters and the company’s tepid forecast reflects the 10% decline in bookings it registered in fiscal Q4 2023. I’ve looked at the company numerous times in the past and held back because of the premium valuation the market was affording the company. With its current forecast, the stock is likely to remain challenged in the near term and likely to provide us with an investment opportunity in the not too distant future.

Welcome to edition 79 of Buyback Wednesdays, a weekly series that tracks the top stock buyback announcements during the prior week. The companies in the list below are the ones that announced the most significant buybacks as a percentage of their market caps. They are not the largest buybacks in absolute dollar terms. A word of caution. Some of these companies could be low-volume small-cap or micro-cap stocks with a market cap below $2 billion.

The level of buyback announcement activity was subdued last week, with just nine companies announcing buybacks, the same number as the previous week.

Top 5 Stock Buyback Announcements 

1. Phoenix New Media Limited (FENG): $1.35

On September 27, 2023, the Board of Directors of this integrated Internet platform authorized a new $2 million share repurchase program, equal to around 13% of its market cap at announcement.

2. Jabil Inc. (JBL): $127.58

 On September 28, 2023, the Board of Directors of this manufacturing services and solutions provider authorised an additional $1.72 billion share repurchase program, equal to around 10.7% of its market cap at announcement.

3. Sensata Technologies Holding plc (ST): $37.59

On September 27, 2023, the Board of Directors of this sensor based products manufacturer approved a new $500 million share repurchase program, equal to around 8.8% of its market cap at announcement.

4. American Outdoor Brands, Inc (AOUT): $9.55

 On  October 2, 2023, the Board of Directors of this outdoor products provider authorized a new $10 million share repurchase program, equal to around 8% of its market cap at announcement.

5. Provident Financial Holdings, Inc. (PROV): $13.01

 On September 29, 2023, the Board of Directors of this bank authorised a new 350K  share repurchase program, equal to around 5% of its market cap at announcement.

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