Bob Ciura, contributing editor to Sure Dividend, completes his countdown of favorite Dividend Kings — a highly select group of just 35 stocks that have raised dividend for at least 50 consecutive years.
This group of companies has stood the test of time in terms of dividend excellence, but not all are created equal. The Dividend Kings are a select group of stocks that have each raised their dividends for 50 consecutive years. This is a very high hurdle to clear, which explains why there are only 35 Dividend Kings in the entire stock market.
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Our top ranked Dividend King right now is ABM Industries (ABM). The stock has a unique combination of a market-beating dividend yield, over 50 consecutive years of dividend increases, earnings growth, and a reasonable valuation.
The end result is that we expect a high level of total returns for ABM stock, making it our top Dividend King for 2022.
Business Overview & Recent Events
ABM Industries is a leading provider of facility solutions, which includes janitorial, electrical & lighting, energy solutions, facilities engineering, HVAC & mechanical, landscape & turf, and parking. ABM Industries has increased its dividend for 53 consecutive years.
The company performed well in fiscal 2021, which is especially impressive given that the company produced positive growth last year as well. During a very difficult year for the economy due to the coronavirus pandemic, ABM still generated earnings-per-share growth for fiscal 2020.
This should have set up a difficult comparison period in 2021, but ABM continued to generate growth this year. In the fourth fiscal quarter, ABM generated 14% revenue growth, as well as earnings-per-share growth of 23%.
Revenue growth was comprised of 7.4% organic growth and 6.8% growth from acquisitions. Organically, ABM has benefited from the steady economic recovery of 2021. The company’s Aviation segment grew revenue by 43% year-over-year, thanks to a resumption of domestic air travel.
Separately, the company’s Technical Solutions segment grew revenue by 21% for the quarter, due to improved customer site access and growth in the e-mobility business.
Overall, ABM generated full-year revenue of $6.2 billion. This was a 4% growth rate for the full year, including 2.3% organic revenue growth and 1.7% revenue growth from acquisitions.
Adjusted earnings-per-share increased 47% in fiscal 2021, to $3.58. For fiscal 2022, ABM expects adjusted EPS from continuing operations in a range of $3.30 to $3.55. The company continues to maintain a strong balance sheet, with a leverage ratio of 1.9x implying a manageable level of debt.
Competitive Advantages & Growth Prospects
ABM Industries has demonstrated the ability to generate steady growth over the long-term. It has even achieved positive growth during recessions, a key feature shared by many Dividend Kings.
Profits have risen consistently for many years; in fact, the last year that ABM posted declining year-over-year adjusted earnings per share was 2003. ABM Industries was even able to grow its earnings-per-share during the Great Recession of 2007-2009, as well as the coronavirus pandemic of 2020.
Because of this outstanding recession performance track record, we believe ABM Industries should be able to do well during future economic downturns.
ABM Industries’ earnings-per-share have grown at a 5% annual rate over the last decade. We believe the company can achieve at least this rate of growth over the next five years.
ABM Industries’ long history of growing its dividend every year is largely the result of its competitive advantages. ABM Industries is one of the biggest companies in its industry, and its history of making acquisitions has enhanced its scale advantages further.
The company frequently utilizes acquisitions to accelerate its growth. A recent example was the acquisition of janitorial services and engineering company Able Services in a $900 million deal. This was a significant deal for ABM; at the time, the acquisition was around one-third of ABM’s market cap.
The acquisition of Able has made an immediate impact since closing in September. In the most recently reported quarter, ABM Industries cited the Able deal as a major reason for the 17.5% revenue growth rate in the Business and Industry segment. This is despite the fact that the Able acquisition had only contributed one month worth of results.
Through organic growth and acquisitions, we expect 5% annual earnings-per-share growth for ABM. For its part, company expectations are to reach $9 billion in revenue by 2025 along with $225 million in annual free cash flow. This growth should translate into continued dividend increases in the years ahead.
Valuation & Expected Returns
We expect ABM to generate earnings-per-share of $3.43 for fiscal 2022. This represents the midpoint of management guidance for the upcoming fiscal year. Based on this, shares trade for a price-to-earnings ratio of 11.3. We view this multiple as too low for a company of ABM’s quality. We maintain a fair value P/E ratio of 17.5 for ABM stock. As a result, the stock appears to be significantly undervalued right now.
In fact, if the P/E ratio expands from 11.3 to 17.5 over the next five years, the corresponding multiple expansion would boost shareholder returns by 9.1% per year. Shareholder returns will also be fueled by the 2% current dividend yield. ABM Industries is not a high-yield stock, but the dividend yield still exceeds the ~1.3% average yield of the S&P 500 Index. And, ABM increases the dividend each year like clockwork.
Along with its recent quarterly results, the company raised its dividend by 2.6%. The upcoming dividend payment will be ABM’s 223rd consecutive quarterly cash dividend, a remarkable level of dividend consistency.
Lastly, future returns will be increased by 5% expected earnings-per-share growth over the next five years. Therefore, total expected returns are estimated at 16.1% per year over the next five years. With such a high rate of expected return, we believe ABM stock is a buy.
Final Thoughts
Investing in quality dividend growth stocks can generate solid long-term returns. This is why we steer dividend growth investors toward the Dividend Kings, a group of 35 stocks that have raised their dividends for 50 consecutive years.
And, we also believe buying undervalued Dividend Kings with positive earnings growth catalysts, is the best of all worlds. ABM Industries is a Dividend King with future growth potential, while the stock is trading at a low valuation. Adding it all up, we rank ABM as the top Dividend King for 2022.
