By: Jake Mann
The business services space has been one of the best performing industries of 2013 thus far, returning 42% year-to-date. Comprised of companies that perform day-to-day facility management, outsourcing, ID tag services and uniform manufacturing, this is a diverse industry filled with approximately 90 U.S.-listed names. Aside from one market-beating small-cap strategy we can think of, there's an interesting, yet under-used way to dissect business services stocks, particularly for dividend investors.
As we've covered a few times before, one of the best ways income investors can find good, solid dividend stocks for the long term is to rank companies according to their dividend streaks. In the business services industry, just three names have upped their dividend payments in 30 or more consecutive years; let's take a look at who they are.
We'll start with ABM Industries (ABM). The diversified facility services company has raised its dividend in 46 straight years, which is the longest streak in the business services industry. ABM is a small-cap name that doesn't receive a lot of press, but its wide range of operations-from cleaning to air conditioning-allows it to generate stable cash flow and earnings.
ABM has beaten Wall Street's EPS expectations in four consecutive quarters and analysts expect the company's bottom line to grow by 6% a year over the next half-decade. Free cash flows have hovered near $125 million for each of the past five years, and ABM has recently averaged a moderate payout ratio between 40% and 50%. There are no red flags here, and shares trade at a fair 17 times forward earnings. Traditional value investors like Chuck Royce and David Dreman are long here, and we'll be watching them closely in future 13F filings.
Automatic Data Processing
Automatic Data Processing (ADP), meanwhile, has the second longest dividend growth streak in the industry at 38 straight years, and it currently offers investors a 2.3% yield at a payout just below 60%. As was the case with ABM, nothing really scares us about ADP. It trades at mostly fair multiples across the board with accelerating earnings growth prospects, and free cash flows have grown by 10% over the past year.
Unlike ABM, there may be less growth prospects available for an outsourcing/processing servicer like ADP, but it's worth noting that the company is the largest in its respective sub-industry. Most analysts expect this space to benefit from overseas expansion and a continued economic recovery, but fears of greater regulation persist. Still, as is consistent with most of its peers, ADP should continue to generate reliable cash flows and earnings, and thus, dividend investors can continue to count on the stock.
Don't sleep on ADP's HR management services segment either. This space is generally expected to have greater growth prospects than the company's outsourcing/processing businesses, but it represents a smaller portion of its revenues proportionally. Keep an eye on the HR data in future ADP financial reports.
Cintas Corp (CTAS) has the third longest dividend streak in the business services industry at 30 straight years, and it currently pays a yield of 1.4%. Cintas is the largest supplier of corporate uniforms in North America, and the business represents over 70% of its revenues. Cleaning, first aid and fire protection services are also offered by Cintas, and document shredding is an underrated, yet robust segment that makes up about 10% of revenues.
Free cash has more than doubled in the past two years and earnings are expected to expand by 10% a year through 2018. A payout ratio below 25% also indicates that more dividend growth is very possible. Like ABM and ADP, Cintas stock isn't overly expensive and the nature of its business indicates there shouldn't be serious disruptions any time soon.
If you're looking to bet on a recovering global economy and you'd like dividend stability, this trio isn't a bad place to start searching. Investors have been paying attention to this space, and the business services industry is having a very good 2013 return-wise. ABM, ADP and Cintas are all up at least 30% year-to-date, so while they may not excite you, we have a hard time finding any overwhelming negatives here.