ABM Industries: Maintaining Growth

ABM Industries: (NYSE:ABM) Jun. 10, 2009 $18.65
52-week range: $11.64 (Feb. 20, 2009) - $27.47 (Sep. 3, 2008)
Dividend = $0.13 quarterly = 2.79% current yield

Company profile by Morningstar :

ABM Industries offers contractual facilities services for industrial and commercial properties. The company provides janitorial services (including floor cleaning and finishing, wall and window washing, and other cleaning services) parking, engineering, and security to hundreds of properties throughout North America. ABM Industries also markets janitorial supplies and equipment.

This company is the largest publicly traded facilities contractor in America. Fiscal 2009 (ends Oct. 31, 2009) will likely mark the fourteenth year of improved year-over-year earnings of the past sixteen. The dividend has been increased in each of the past 15 years.

Unlike most companies, ABM is on pace to see decent earnings per share growth this year. Their April quarter came in at $0.32 versus $0.29 on continuing operations after a January comparison of $0.25 versus $0.13. Management sees FY earnings of $1.25 - $1.35 against $1.10 in FY 2008.

Here are the per share numbers as reported by Value Line:

Zacks sees FY 2009 and 2010 EPS at $1.31 and $1.56 putting ABM’s multiples at < 14.3x this year’s and < 12x next year’s estimates. Compare those to the historical levels in the chart above.

The current yield of 2.79% compares favorably with both ABM’s historical payouts and that of bank CDs and T-bills currently available. The payout ratio is under 40% of expected 2009 earnings.

A rebound to 15x calendar year 2009 earnings would bring ABM shares back to above $20 by year-end. Is that a reasonable target? Sure. These shares hit peak prices of $22.50, $21.90, $24, $31.20 and $27.50 in each of the years 2004-2005-2006-2007 and 2008 respectively all when fundamentals were less favorable than they are today.

The trend towards corporate outsourcing bodes well for future revenue growth. Value Line rates ABM’s ‘earnings predictability’ in the 85th percentile (with 100th being best).

Here’s a nice combination play out to January 16, 2010:

If ABM shares rise by 7.3% to at least $20 by Jan. 16, 2010:

The $20 calls will be exercised.
Your shares will be sold for $20,000.
The $20 puts will expire worthless.
You will have collected $390 in dividends.
You will have no further option obligations.

You will end up with no shares and $20,390 cash for your original cash outlay of $13,850.

That’s a best-case scenario total return of:

$6,540 / $13,850 = + 47.2% achieved in under 7.5 months on shares that only needed to rise by 7.3% from the trade’s inception price.

What’s the risk?

If ABM shares finish < $20 on Jan. 16, 2010:

The $20 calls will expire worthless.
The $20 puts will be exercised.
You will be forced to buy another 1000 shares of ABM
and to lay out an additional $20,000 cash.
You will have collected $390 in dividends.
You will have no further option obligations.

You will end up with 2000 shares of ABM and $390 cash.

What’s the break-even point on the whole trade?

On the first 1000 shares it’s the $18.65 purchase price less the $1.60 /share call premium = $17.05 /share.

On the ‘put’ shares it’s the $20 strike price less the $3.20 /share put premium = $16.80 /share.

Your average cost would be the average of $17.05 + $16.80 / 2 = $16.93 /share or 9.2% below your starting price of $18.65 /share (excluding dividends).

What if the shares stay exactly where they are through expiration date?

You would own 2000 shares that could be sold for $37,300 and hold $390 from dividend payments.

Your net cash outlay would have been $13,850 + $20,000 = $33,850.

Cash at Liquidation = $37,300 + $390 = $37,690

Net Cash Outlay …................. = $33,850
Net Total Return …................. = $3,840 (if ABM remains unchanged)

Summary: If ABM shares climb to at least $20 (up 7.3%) by expiration date your total return will be over 47%. cash-on-cash.

If ABM is unchanged you still have a net profit of $3,840/$33,850 = 11.3%
in less than 7.5 months.

You are protected against loss unless ABM shares decline by more than 9.2% before January 16, 2010.

Disclosure: Author is long ABM shares and short ABM options.

Comments

[Paul Price:]

Small Stocks, Large Dividends - Barrons

THURSDAY, JUNE 11, 2009
WEEKDAY TRADER - Barrons

By JOHANNA BENNETT

Instead of focusing on blue chips, income-seeking investors might be wise to consider some smaller names.

IN SEEKING OUT STOCKS that pay out decent dividends, most investors tend not to think beyond the blue chips.

That's a mistake: Since many household-name stocks have cut their dividends in recent months, and may well have to cut them further, many solid and dependable dividend stocks can be found among lists of small-cap and mid-cap names.

These smaller stocks often generate stronger growth in their dividend payments over time.

To come up with names that won't let investors down, Barrons.com identified 118 companies with market values between $800 million and $3 billion that have hiked dividends for five consecutive years. To be considered, a stock had to pay a current dividend yield of at least 2.5%.

We eliminated companies that were not profitable or not expected to generate profit growth. Financial companies were struck from the list. We also nixed companies with a debt-to-capital ratio over 60% or any firms paying out more than 60% of their annual earnings in dividends.

Companies with high payout ratios have a harder time protecting their dividends in an earnings downturn.

(Our selection criterion ended up weeding out several classic high-yield types of stocks, including REITs, master limited partnerships and many utilities companies.)

Among the stocks left standing were Universal (ticker: UVV), Owens & Minor (OMI), Flowers Foods (FLO), South Jersey Industries (SJI) and ABM Industries (ABM).

None of these stocks are household names. In fact, only two sell-side analysts cover ABM, which provides cleaning services for industrial and commercial properties.

But all are well-established firms. In fact, the youngest, Flowers Foods, was founded in 1919.

"It is getting hard to find stable, growing dividends so you have to do a lot of hunting'" says Howard Silverblatt, the senior index analyst at Standard & Poor's, referring to the rash of dividend cuts by big companies.

"These days, small-caps are an acceptable way to go," he adds.

That notion flies in the face of some long-held biases on Wall Street. Small-cap stocks are typically liked for fast-climbing profits and high-flying stock prices, not dividend income.

Unlike goliaths in the S&P 500 -- where 72% of the stocks in the index pay a dividend -- small firms often reinvest earnings to fuel future growth, rather than reward shareholders.

Still, dividend-paying stocks account for 56% of the the S&P MidCap 400 Index and one-third of the Russell 2000 Index, including tobacco merchant Universal.

With a yield of 4.8%, Universal is the smallest company on our list. But it has the longest track record of dividend hikes, having raised its payout every year since 1971.

"People believe there is a scarcity of small companies paying dividends," says Paul Magnuson, co-manager of the Allianz NFJ Small-Cap Value Fund. "It's one of the best-kept secrets in the small-cap arena."

Of course, confidence in dividends has waned greatly.

Since the start of 2008, 967 dividends paid by U.S. companies have been cut or suspended, according to Standard & Poor's.

In seeking dividend stocks, investors should focus on companies with strong balance sheets and enough free cash flow to fund the dividend payment.

"In this environment, dividends are really important because they are a measure of quality," Magnuson adds.

One of the biggest companies on our list is Flowers Foods, with a yield of 3.3%.

The bread maker's first-quarter profits were hurt by commodities hedges that backfired. Still, profits could climb 12% this year thanks partly to recent acquisitions.

In fact, the timing of Flowers' latest quarterly dividend hike -- a 17% increase on May 29 -- "highlights considerable confidence in earnings growth," says Farha Aslam, an analyst with Stephens Inc.

The same can be said for hospital-supply wholesaler Owens & Minor and gas utility South Jersey Industries.

Compared to other picks, Owens' 2.5% yield looks modest. But the 127-year-old company raised its quarterly dividend by 15% in February.

Also, dividends only consume one-third of Owens' annual profits, which are growing 8% this year and 11% in 2010.

South Jersey, meanwhile, raised its quarterly dividend 10% in late November, well above the company's target.

With a 3.5% yield, its payout consumes just 48% of profits, well below the industry norm.

Those profits, meanwhile, should grow 7% annually over the next three to five years.

Other names, however, have had a harder time.

With a yield of 2.8%, ABM raised its dividend 4% in December even though office vacancy rates have cut into demand for janitorial services, which is 70% of their revenues.

Still, cost cuts and the acquisition 18 months ago of ABM's biggest rival will help drive profits up 19%, to $1.33 a share, during the fiscal year scheduled to end on Oct. 31, 2009, says Dave Gold, an analyst with Sidoti & Co.

Meanwhile, Gold sees the century-old company generating $88 million in free cash flow this year, more than enough to cover its $25 million dividend payout.

"It wasn't a huge dividend hike, but it says a lot about their business," says Gold.

Of course, just because a company has a long history of increasing dividends does not mean that payments will keep rising, or survive.

These stocks also tend to be far less diversified than their bigger rivals, depending on a single region or product for their livelihood.

Still, investors can take dividend payments from some small-cap companies to the bank.


----------------------...

Bank On These Small-Cap Dividend Stocks

Companies ........... Ticker ......Yield .......... EPS Growth
Flowers Foods ....... FLO ...... 3.30% ........... 12%
Owens & Minor ..... OMI ...... 2.50% ........... 8.0%
South Jersey Ind.... SJI ........ 3.50% ........... 7.5%
ABM Industries ..... ABM ....... 2.80% ........... 21%*
Universal .............. UVV ....... 4.90% ............ 1%**

*Projected for ABM's fiscal year that ends on Oct. 31, 2009.

**Projected for Universal's fiscal year that ends on March 31, 2010.

Source: Thomson Reuters

Jun 12 07:27 AM