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Accenture PLC (NYSE:ACN) is an Ireland-based business consultant that provides management consulting, technology services and outsourcing to various businesses and companies around the world.

Accenture trades on the New York Stock Exchange under the ticker “ACN”.

ACN is part of the S&P 500 index.

ACN currently trades around $83.00 and currently yields about 2.24%.

ACN is an Irish corporation but pays its semi-annual dividends in U.S. dollars. All the following figures are thus in U.S. dollars.

Since ACN is based in Ireland, foreign investors will likely be subjected to withholding tax.

Dividend Calendar

ACN pays a semi-annual dividend.

The dividends are generally declared in March and September, and are generally paid in May and November.

ACN typically increases its semi-annual dividend once a year, in September. In that sense, the last dividend increase, in September 2013, was of 14.8% (from $0.81 semi-annually to $0.93 semi-annually).

Dividend History

With the most recent increase, ACN has increased its quarterly dividend for 9 consecutive years, making the company a dividend challenger (between 5 and 9 years of consecutive dividend increases).

The evolution of the annualized dividend and of its growth over the last ten years is presented in the graph below.

(click to enlarge)

The first thing to note from the graph is the dividend growth spike in 2010. Simply, in fiscal year 2010, ACN changed its annual dividend payment schedule to a semi-annual payment schedule. So fiscal year 2010 includes both an annual dividend payment and a semi-annual payment. This explains the dividend growth spike of 2010.

Also, since ACN has started to pay a dividend only in 2006, I don’t have a 10-year average.

However, over the last 8 years, ACN as been raising its dividend at the average compound dividend growth rate of 27.24%. This rate is a pretty aggressive rate. But I suspect ACN is trying to bring its dividend to a more reasonable level. At some point, I believe ACN will slow down the dividend increases.

Dividend Analysis

In this section, I verify two important aspects of the dividend:

  1. Is the current dividend safe?
  2. Is the current dividend likely to grow?

Understandably, answering no to either one of these questions should mark the stock under consideration as being unsuitable for dividend investment purpose.

Is the current dividend safe?

To determine the safety of the dividend, I check the historical levels, the current level and the evolution of the payout ratio with respect to the earnings and, when relevant, with respect to the free cash flow.

First, the evolution of the earnings, dividends, and payout ratios.

(click to enlarge)

Then, the evolution of the free cash flow, dividends, and payout ratios.

(click to enlarge)

To begin with, with respect to the earnings, the dividend payout ratio has been under 35% over the last 8 years (except in 2010 due to the exceptional dividend payment). Similarly, with respect to the free cash flow, the dividend payout ratio has been under 40% over the last 8 years.

A payout ratio under 40% is safe as it provides more than enough margin should ACN face one or two tougher years.

Still, what is clearly apparent from the two graphs is the upward trend in the payout ratios. In other words, the dividend is growing faster than both the earnings and the free cash flow.

In that sense, as I mentioned above, I think ACN is aggressively increasing its dividend to reach a target payout ratio. Once ACN reaches that target, I think the dividend growth rate will be more in line with the earnings and/or free cash flow growth rates. Otherwise, the payout ratios will reach unsustainable levels.

In any event, with current payout ratios under 40%, I think the dividend is safe

Overall, I think the current dividend is safe.

Is the current dividend likely to grow?

The short answer is yes.

ACN has been increasing its dividend at double-digit rates since initiating a dividend in 2006. For me, that shows that ACN has the willingness to pay meaningful and growing dividends to its shareholders.

In addition, as we have seen above, the business is growing and the current payout ratios are still reasonably low, giving ACN more room for further dividend growth.

So yes, the dividend is likely to grow.

I would only add that I don’t think ACN will maintain the recent average dividend growth rate in the foreseeable future. Since the dividend has been growing faster than both the earnings and the free cash flow, the dividend growth will have to slow down at some point to allow the earnings and free cash flow to catch up.

Overall, I think the current dividend is likely to grow in the foreseeable future.

Stock Valuation

Estimated Fair Values

To calculate a range of fair values, I calculate how much one share will return in cumulative dividends over the next 20 years, according to different scenarios, and adjusted for inflation.

The calculations are performed using the affiliated website Dividend Stock Valuation.

For ACN, I’ve used the following inputs:

  • Share price: $83.00
  • Dividend rate: $1.86
  • Dividend growth rate:
    • Optimistic scenario: 34.0%
    • Realistic scenario: 27.2%
    • Pessimistic scenario: 20.4%
  • Discount rate: 3.5%

The optimistic DGR generally corresponds to the 10-year average, while the realistic and pessimistic DGRs respectively correspond to 80% and 60% of the optimistic DGR. In the present case, the optimistic DGR corresponds to the 5-year average since ACN does not have 10 years of dividend history.

According to the above values, the range of estimated fair values for ACN varies from $223.19 (pessimistic) to $1098.89 (optimistic) with a realistic value of $493.80.

With a current share price around $83.00, ACN appears significantly undervalued.

However, given the fact that the recent average DGR is very high, even the pessimistic valuation is most probably very optimistic.

So, I’ve calculated that the DGR would need to be 11.54% over the next 20 years to justify the current price of $83.00. Compared to its recent historical average, this DGR is low.

Given the growing trend in both the earnings and free cash flow, I think ACN could maintain a DGR of 11.54% over the next 20 years. However, maintaining a DGR of more than 10% over 20 years is not necessarily easy.

So, even if ACN could possibly maintain such a DGR, that would not leave much margin of safety.

At $83.00, I think ACN is fairly valued as a dividend investment.

Estimated Cash Return

With the estimated cash return, I calculate how much cumulative dividends a fixed investment in the stock under consideration will return over a period of years.

Estimated cash return values allow to compare dividend stocks with different yields and different growth rates.

For ACN, I’ve used the following inputs:

  • Initial investment: $1000
  • Current yield: 3.65%
  • Dividend growth rate:
    • Optimistic scenario: 20.0%
    • Realistic scenario: 16.0%
    • Pessimistic scenario: 12.0%

Notably, the DGRs are the same as the DGRs used for valuation.

I also compare the various estimated cash return values with the estimated cash return of a benchmark dividend stock having a yield of 3% and a dividend growth rate of 8% (e.g., Procter & Gamble (NYSE:PG) or Johnson & Johnson (NYSE:JNJ)).

(click to enlarge)

If ACN could maintain a DGR of 34% over the next 30 years, I would buy stocks by the truckloads. However, I’m not aware of any company that has managed such a feat. Even maintaining a DGR of 20.4% would be almost impossible.

Still, if ACN can manage to maintain a DGR of 11.54% over the next 30 years, an investment in ACN would return more money than a comparable investment in the benchmark stock.

But, then again, I think that maintaining a DGR of 11.54% over 30 years would be a stretch for ACN.

At the current price and yield, I think ACN would make a medium risk dividend investment.

Conclusion

With its reasonable yield, aggressive dividend growth rate and reasonably low payout ratios, ACN would seem to be a very interesting dividend stock.

However, in view of my analysis, I think ACN is a bit too expensive given the fact that the dividend growth rate will most likely drop in the near future.

In addition, since ACN is located in Ireland, I don’t know what will be the effective withholding tax rate. According to Deloitte, the withholding tax rate could be as high as 20% for some investors.

So, given the lack of margin of safety and given the possibly high withholding tax rate, I would not buy ACN at the current price and yield.

Final recommendation: I don’t think ACN is a buy at the current price.

Full Disclosure

I don’t currently own shares of ACN. I don’t intend to initiate a position in ACN within the next 72 hours.

Source: Accenture PLC - Dividend Fact Sheet