Service Bundling Sweeps Up

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Motley Fool Income Investor recommendation ServiceMaster (NYSE: SVM) is what AT&T (NYSE: T) wanted to be -- a bundled service provider to the homeowner. While AT&T failed to bundle voice, data, and video to the home, ServiceMaster has succeeded in bundling everything from lawn care to pest control to maid service. It has turned out a nice 3.5% dividend for investors, too.

While Home Depot (NYSE: HD) and Lowe's (NYSE: LOW) are catering to the do-it-yourself crowd, ServiceMaster says, "Let us do it" (my words; not theirs). Or, to be politically correct, it wants homeowners and commercial customers to outsource their in-house needs. From snow removal to air-conditioning repair, they are ready to serve.

Today the company served up its third-quarter results. Revenue rose 3%; operating income was flat but matched analyst estimates. The company is on track to earn $0.59 a share this year and an estimated $0.66 next year.

To understand the opportunity, look at the competition. Rollins (NYSE: ROL) focuses on pests and earns slightly better margins. Ecolab (NYSE: ECL) offers services as diverse as cleaning, pest control, and maintenance to industrial customers -- and earns higher margins, too.

ServiceMaster needs to optimize its individual offerings so they produce peer-level performance -- and it's close to doing that with this quarter's 11.8% operating margins. At the same time, it needs to be able to cross-market its other services cost-effectively to existing customers.

ServiceMaster has the luxury of producing enough cash that it can pay an excellent dividend, repurchasing shares ($14 million this quarter) and reducing debt (which, at $808 million, is high at 1.0 times equity).

At 19 times 2005 earnings, ServiceMaster may not look like a bargain. Keeping the stock price high is its 3.5% dividend, its improving balance sheet, and a recent purchase by Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B). The stock is suitable for investors, such as Warren Buffett, who are looking for dividend income and a business strategy they can clearly understand.

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Fool contributor W.D. Crotty owns stock in Home Depot and Berkshire Hathaway.