SAIC: A 7.5% Special Dividend, A 3.5% Yield, And Limited Sequestration Cuts

Kraken profile picture

With sequestration having been passed, investors may be concerned about companies with heavy exposure to areas such as the Department of Defense. It's logical to believe that defense cuts will materially impact contractors. However, there is one company that believes that the sequestration will have an immaterial impact. It is also putting money where its mouth is by distributing more capital to shareholders.

SAIC (SAI), which provides IT and engineering services to the DoD and other federal agencies, has announced a $1 special dividend to be distributed in June to all common shareholders. The special dividend has a yield of 7.5% at current market prices. This is a nice distribution for shareholders, and should ease concerns about sequestration. Management is signaling that even with budget cuts, the company will be fine.

Even sequestration, management has mentioned that backlog has not changed at all. The company ended the quarter with $17.9 billion in backlog, and has already received $5.4 billion of it. There has been no reduction in backlog so far with the budget cuts.

SAIC has already submitted bids on $24 billion worth of contracts. During Q4, the company won 8 contracts with more than a $100 million each. This does not include the $1 billion in classified intelligence programs.

So as we can see, budget cuts have not really made any dent for SAIC. FY 2014 EPS is expected to be $1.16-$1.33. The range is larger since management is being cautious about the $42.5 billion in defense cuts. However, I do believe that the company is likely to earn above $1.25 per share given the current backlog and the new bids that went out.

As for free cash flow going forward, cash flow from operations is expected to be $450 million for FY 2014. CapEx is only going to be 1% of operating

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Kraken profile picture
I am an investor that's focused on ideas that generate passive income. I love to get exposure to up and coming markets. I also like distressed assets and buy bonds of companies that have been knocked down. I like equity plays that include selling options to either initiate positions or generate income. I love talking to traders and investors alike and hoping that we can all make money in these volatile markets.

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