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The Truth Behind Accenture’s High Return on Equity

You might want to examine ROI as a better alternative to ROE.

"Debt" hasn't really increased at all--liabilities have increased (as have assets).

The Truth Behind Accenture’s High Return on Equity

Many have that much or more. Try IBM, for instance.

The Truth Behind Accenture’s High Return on Equity

Interesting angle, but I disagree with your conclusion that "from an investor's point of view both have achieved the same result."

From an investor's point of view, Accenture has returned $100 million of capital to them. They can then reinvest that elsewhere. If the investor can get 15% returns on an alternate investment, then they are better off. Second, Accenture cannot (would not) invest in marketable securities that return 10% -- they must invest in high quality (safe principal) instruments. Accenture is not an investment company and has no business trying to obtain high yields from marketable securities.

Bottom line: Investors are very sensitive to ROE because they want companies to produce high returns on the equity that has been entrusted to them. By returning capital to shareholders via buyback and still earning the same net income (as you state above), Accenture will earn a higher ROE, which (and this is the Important Conclusion) will be VIEWED AS MORE VALUABLE BY INVESTORS than if the company earned income on marketable securities.

The Truth Behind Accenture’s High Return on Equity

I agree with your revised math.

I have no idea why you are suggesting that investors look at the lower ROE figure when comparing Accenture's ROE to other companies. Are you saying that the share buybacks are irrelevant or unusual in nature?

The Truth Behind Accenture’s High Return on Equity

Best guess is that the reduction in Paid in capital would be a good approximation for cash spent, or $943 million. 4% interest rate? That leads to $38 million in income or call it $25 million after taxes.

You already grossed up the denominator -- that was the $725 million you calculated and added back to book value. So you need to add the approx $25 million to the numerator to complete your analysis.

That boosts ROE by 1%.

You never answered the question--is your conclusion from your analysis that Accenture's ROE would be lower if they didn't buy back stock?

The Truth Behind Accenture’s High Return on Equity

Dan,
In the interests of my sanity I will not harp on about how you have mangled the share count/class structure of ACN's shares. I will just say that when calculating your ROE figure, you have to reduce equity by the value of the minority interest equity value when using the lower share count. That aside....

If I understand the conclusion of your analysis correctly (please correct me if I am wrong), you are saying that if Accenture had not bought back any shares since 2004 (thereby increasing treasury shares and reducing equity), then their ROE would be lower. Is that right? Two thoughts:

1) You neglected to add back interest income on the substantial amount of cash used to buy back shares. If you are making the assumption that treasury shares should remain at 6 million, then you have to assume that the cash used to buy those 30 million net shares would be throwing off substantial interest income, which would boost ROE.

2) OF COURSE if the company lets cash sit in a bank account its ROE will be lower than if it gives that cash back to shareholders. Classic capital allocation decision--maximize returns on capital. If they could take that cash and invest it in business operations or investments that would be accretive to ROE, then they would not buy back shares. But since the company does not need cash to run its operations, they give it back to shareholders.

A little too much analysis to come to a very basic answer.

Why is Accenture's Market Cap Less Than Infosys'?

Dude, you've got your picture on the top of this posting and your name attached to each article. It's your reputation, not mine. If you're trying to say that your advice and insights are worthless because seekingalpha is free, then I guess that we shouldn't waste our time reading what you write. I only posted because you seem to put up a lot of information about this sector and I thought that you actually cared about informing and educating.

Garbage In Garbage Out. I'm disappointed.

Why is Accenture's Market Cap Less Than Infosys'?

Dan,
I cannot speak for Accenture IR. Unfortunately there are many, many data services out there (Thomson, Reuters, Yahoo, Google, Excite, AOL, CapitalIQ, Bloomberg, First Call, The Markets.com, etc.) and on any number of companies there will be material errors in their databases, especially since those databases are increasingly being populated automatically or by (otherwise intelligent) people who are not experts in the subject matter. If I look at 100 companies, I will probably be able to find 100 errors, some perhaps minor, in their data on the various data services. I can't speak for Accenture's IR, but I suspect that they don't have the time or desire to hunt down and correct every error. But perhaps they would care. Perhaps in the course of your conversation with them, when they are helping you understand their share count, you can point Yahoo's error out.

By the way, Yahoo Finance is free. You get what you pay for.

Why is Accenture's Market Cap Less Than Infosys'?

I'm staring at Reuters numbers right now and there are two share counts:
Total Shares Outstanding: 778.2
Diluted Shares Outstanding: 867.3

Mike, I am in AGREEMENT with you that Accenture's market cap is greater than Infosys, contrary to this article. That was my original argument, which the original writer has been vehemently denying. I'm also saying that your calculation is incorrect and that the correct Market Cap is closer to $36 billion based on 867 million shares.

Like I said, you did NOT check your numbers with Accenture investor relations as you claimed. Here's the number: 917-452-5106.

No Fiction, just the FACTS.

Why is Accenture's Market Cap Less Than Infosys'?

Mike, I call shenanigans on you. Name (initials to protect their privacy if you wish) the IR person you spoke with. I don't think you got 778 million from anyone in Accenture IR. That is something Reuters created and any service that uses Reuters data repeats. I've spoken with IR within the past three months (S.K.) and the 778 million is -- FACT -- incorrect.

Why is Accenture's Market Cap Less Than Infosys'?

Mike, I appreciate the attempt but this is in error also.

The 778 million is the sum of Class A and Class X, but Class X shares, despite being listed on the cover of the filings for regulatory purposes, do not count as tradable shares. They do not have voting rights or economic rights. Only the SCA Class-1 shares are convertable 1-for-1 in to Class A shares, which are the ones that freely trade. The SCA shares have full voting and economic rights.

Here's a clue for you all. Look at the income statement. At the bottom there is a line called Income before Minority Interest. That is how much money the company is making. The "Minority interest" that is then subtracted to arrive at net income represents earnings attributable to the 263 million shares that are represented by SCA and Accenture Canada shares. This minority interest is what has you guys confused. It is nothing but the collection of thousands of Accenture investors (mostly employees/retured employees) who own SCA or Canada shares. They are shareholders like anyone else except that there are certain distribution restrictions on their shares (that lift gradually over time). Accenture cannot control those shares. They can buy them back like any other share if they can convince the owners to sell.

Class X is nothing. It was used as a stub in the past for certain tax issues. Accenture has been aggressively redeeming them for $0.0000225 each to get them off the books (41 million retired in the February quarter alone).

Why is Accenture's Market Cap Less Than Infosys'?

Dan,
For accounting purposes the SCA Class-1 shares are considered minority interest (even though, as a class, they are not controlled by a single entity). This is what is tripping you up.

Answer this: If a private equity firm wished to acquire 100% of Accenture, how much would they have to pay (ignoring acquisition premium, etc.)? If you beleive that $24 billion is the right number, then you should start assembling a group of investor IMMEDIATELY! This would be the bargain of the century.

Dan, I will stay subscribed to this thread in case you have anything else to say, but until you check your facts by calling investor relations (they are there to help investors and analysts--even the sensible ones) or by speaking to an investment professional who knows Accenture's stock, I cannot keep banging my head against your wall of ignorance. I gave you the number above--they are quite friendly.

Why is Accenture's Market Cap Less Than Infosys'?

THE LAST LINE CLEARLY STATES THAT THE CLASS X SHARES DO NOT CARRY ANY ECONOMIC RIGHTS.

Look, Dan Menashi, you are showing a great deal of ignorance on this subject and I am embarrassed for you. Please do your homework. Call Investor Relations and ask for some help on this subject: 917 452 5106.

Why is Accenture's Market Cap Less Than Infosys'?

Yes, if Company A gives out 1 million more shares then the fully diluted number of shares outstanding will increase, thereby reducing the value of the stock.

Accenture does not OWN the SCA Class-1 shares. Those are already owned by third parties. They are ALREADY in the share count. Accenture cannot decide tomorrow to make those shares public -- they have no control over them.

I do agree that the share price could go down if all of the SCA shares were to suddenly go on the market tomorrow--that assumes that the owners (not Accenture) would want to sell all their shares tomorrow. But this assumption needs to be made about Infosys' shareholders too, in that case. Infosys management owns over 10% of their shares, Fidelity owns around 2%, etc. Should we be excluding all these shares since they are not "trading"?

Why is Accenture's Market Cap Less Than Infosys'?

Let's just deal with facts.
1) The number of shares outstanding are 867 million. This has NOTHING to do with Class X. Please refer to my post above regarding SCA Class I and Accenture Canada shares. These shares have voting rights and share equally in the economics of the company (including participating in dividends).

2) There is no "opinion" required in calculating "Market cap". This is a well defined investing term that is simply the stock price times the total number of diluted shares outstanding. The number of shares publicly traded is referred to as the "float" and it has absolutely no bearing on the quantitative value of a company.