Protect Your Investing Turf With This Dividend King

ABM Industries is a top Dividend King for investors seeking to generate total return in the next five years. Let me explain why. First, the company has a strong business model with robust competitive advantages. ABM provides building maintenance services including janitorial, electrical and lighting, energy and engineering, HVAC and mechanical, landscape and turf, and parking services. It has a diversified list of customers, as it serves multiple major industries including aviation, technology and education. Second, the company has a growing bottom line. ABM Industries reported its second-quarter earnings results (fiscal 2021) on June 9 showing that revenue of $1.5 billion was flat from the previous year's quarter. Despite flat revenue, however, margin expansion helped the company grow its bottom line. Earnings-per-share of $0.82 beat analyst estimates by $0.11 per share, representing 37% year-over-year growth. ABM Industries' earnings-per-share growth came as a large surprise to the market and most analysts, who didn't expect profitability to be this high during the quarter in a time when revenues were flat year over year. ABM Industries was able to lower its expenses significantly, which allowed for a steep increase in its profit margins. Management also increased its earnings-per-share guidance to $3.30 to $3.50 for the full fiscal year. ABM Industries has generated annual earnings growth at a 5% rate over the past decade. Profits have grown very consistently, as profits have risen during every year of the last decade. This is a remarkable feat that underlines the non-cyclical nature of ABM Industries' business model. Because of this outstanding recession performance track record, we believe ABM Industries should be able to do well during future economic downturns. The company also has positive growth catalysts, both organically and through acquisitions. Though its international presence is mostly confined to Canada, the company has entered the United Kingdom market in recent years with its 2014 purchase of GBM Support Services and its 2015 purchase of Westway Services. International growth is a major catalyst going forward. ABM Industries also plans to capture a meaningful amount of synergies over the years, which could be a positive for the company's long-term earnings-per-share growth rate. In addition, as one of the largest companies in its industry, ABM Industries has a scale that can't be matched by peers. This allows the company to go after national accounts, which allows it to acquire a significant of business all at once. ABM has a history of making acquisitions that have enhanced its scale advantages further. It is likely that the company will continue to make acquisitions to increase its size further through additional takeovers in the future. Valuation, Expected Returns Look Green ABM Industries stock is attractive on many fronts, and it has a special appeal for dividend growth investors. The stock has a 1.6% dividend yield, which exceeds the average yield of the S&P 500 Index right now, by about 30 basis points. Moreover, the company has increased its dividend for 53 years in a row, including the most recent ~3% raise in December 2020. Even though the coronavirus pandemic wreaked havoc on the U.S. economy last year, which forced many dividend payers to cut or eliminate their payouts, ABM continued to hike its dividend. The dividend payout remains highly secure today. ABM is expected to maintain a dividend payout ratio of 22% for 2021, a very low payout ratio, which leaves plenty of room for future growth. Having such a low payout ratio is one reason why the company can continue to raise its dividend during recessions, as it has flexibility even when earnings per share takes a temporary dip. Due to the low dividend payout ratio and its very stable, recession-resilient business model, ABM Industries' dividend looks safe. ABM Industries would likely not be harmed during a recession in a meaningful way, which is why we believe it is a low-risk investment from that perspective, including during this pandemic. The stock is not only attractive for dividend growth, but also for its low valuation. We expect the company to generate earnings-per-share of $3.40 for 2021. With a fiscal 2021 price-to-earnings ratio of 13.9, this is well below our fair value estimate of 17.5. The stock is trading below its average annual P/E multiple going back 10 years. If the P/E multiple expands to 17.5, this would lift annual returns by 4.7% per year over the next five years. In addition, future returns will be fueled by earnings growth (which we estimate at 5% per year) plus the 1.6% dividend yield. In all, we expect total shareholder returns of 11.3% per year. An estimated potential return above 10% per year makes the stock a buy in our view. We believe this is a good opportunity for dividend growth investors to consider. Not only does the stock have a positive growth outlook and a market-beating dividend yield, shares appear undervalued. As a result, ABM Industries is a Dividend King with a high level of expected return, making the stock a buy.

Protect Your Investing Turf With This Dividend King

ABM Industries has a strong business model with robust competitive advantages.

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