Markets

This Company's Bold Plan Could Lead To Major Upside

To sideswipe market volatility, investors often focus on companies that offer solid long-term growth and reliable dividends.

Plenty of large companies fit that description, but so do some smaller ones. Take ABM Industries Inc. (NYSE: ABM ) , a venerable building maintenance firm with a $1.7-billion market value and annual revenues in excess of $5 billion.

How stable is this company's business model across business cycles? It has paid steady dividends for 50 straight years.

From Humble Beginnings To A Diverse Enterprise

Despite having roots dating back 1909, ABM probably still isn't on many investors' radar screens. But you should get to know this firm. It has come a long way from humble beginnings as a one-man window-washing service.

Janitorial services have long been the heart and soul of ABM and still generate about half of revenue. The rest of the sales base is derived from a diverse lineup of service offerings such as maintenance and management of electrical and climate-control systems (with a focus on energy efficiency), security services, landscaping and parking management.

Today, ABM serves thousands of customers with many types of nonresidential properties, from office buildings and educational institutions, to airports and stadiums. Dodger Stadium, Cornell University and the Los Angeles Convention Center are among the firm's high-profile clients.

ABM is adept at signing customers to multi-year contracts, and long-term retention rates are generally over 90%. This translates into a high degree of recurring revenues, which have contributed to uninterrupted top-line gains averaging about 7% annually since fiscal (October) 2009. Projected 2015 earnings of $1.80 a share represent more than a 70% increase since 2009.

Investors have taken note of the company's operational consistency, pushing the stock's total return up more than 200% over the past 15 years, versus a total return of just 74% for the S&P. Steady dividend increases during that time have helped maintain the dividend yield at 2.1%, roughly in line with the yield offered by the S&P 500.

Future performance should remain solid as the company's markets remain highly fragmented: ABM's roughly 6% share of the janitorial services space is about five times that of the nearest competitor. Plus, ABM doesn't have to worry much about rivals with disruptive new technologies, since the tools of its trade are generally low-tech.

This company performs especially well when the economy is expanding. A good economy means more new construction of office buildings, hotels and other commercial properties, as well as higher occupancy rates for existing properties. Both factors typically lead to more business for ABM.

Rebounding Cash Flow And Rising Dividends

Some may be concerned by the fact that free cash flow fell 40%, to $83 million, in the three years ended fiscal 2014.

But that decline is the result of a stepped-up pace of external and internal investments which have helped the cement the company's market positioning.

During the ramp up, the firm focused on acquisitions and spent more than $500 million to buy all or part of several rivals, including Airco Commercial Services and Alpha Mechanical. These additions boosted ABM's presence in reliable markets such as airports, municipal governments and academic institutions. They also augmented key services such as HVAC and plumbing maintenance, building environmental controls and energy management.

With such outlays now tailing off, ABM is once again positioned for free cash flow growth, which has already rebounded somewhat to $90 million in the past 12 months. Analysts forecast free cash flow of $1.75 a share, or nearly $100 million, for the current fiscal year.

To help meet that forecast, ABM announced plans to streamline operations which should ultimately lead to $40 to $50 million in annual cost savings when the program is completed by the second quarter (April) of 2016.

In tandem with that announcement, ABM also announced a $200 million share buyback, which could reduce shares outstanding by more than 10%.

And management is expected to stay focused on dividend growth as well. Conservative cash management enabled uninterrupted dividend raises for the past decade, with the payout climbing to the current $0.64 a share from $0.42 in 2005. With free cash flow poised to expand, management could substantially accelerate the pace of future dividend growth.

I anticipate 45% capital gain potential in the coming five years, assuming recent earnings multiples stay constant.

Risks To Consider: Despite its relative dominance, ABM always faces heavy competition, especially for coveted contracts like those mentioned above. The loss of such contracts could have a significant impact on sales, profits and dividends.

Action To Take: ABM industries may be small, but it's an appealing choice for investors seeking a reliable, defensive investment with a long history of dividend increases and robust share price growth. At about 15 times 2016's projected profits, shares are attractively priced compared with their historical forward earnings multiple of 18. And with the market looking set for more wild gyrations, there may be opportunities to buy in at even cheaper valuations in the coming weeks.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.