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Is Accenture PLC a Buy?

By Brian Feroldi - Sep 29, 2018 at 11:15AM

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Is it too late to buy shares of the IT consulting giant?

Technology changes fast. Keeping up with the latest and greatest products and innovations is no small task. However, companies can't afford to ignore the latest technologies, or it will put them at a permanent competitive disadvantage. That's why thousands of businesses are willing to spend lavishly on IT consulting services such as those offered by Accenture (ACN 0.12%)

Investors in this high-quality business have made out like bandits over the long term, but could there be more gas left in the tank? Let's take a closer look to find out.

Businesspeople looking at a presentation.

Image source: Getty Images.

The business

At its core, Accenture is a people business. The company employs a worldwide army of more than 440,000 people who service thousands of clients in 120 countries. Accenture spends generously on training to ensure that its employees are well versed in the latest tech trends. The company then sells consulting and outsourcing services to businesses that are in need of help.

The range of services that Accenture offers is mind-boggling; the company can consult on digital marketing, the Internet of Things, cybersecurity, blockchain technology, data analytics, and more. This broad-based expertise helps the company to land new clients and continue to win more business from existing ones. In fact, Accenture does business with more than 75% of the Fortune Global 500, and its top 100 clients have been customers for at least five years.

Accenture also makes extensive use of partnerships to continue to win new business. The company is the No. 1 partner with tech giants such as SAP, Oracle, Microsoft, HP, and Salesforce.com. These relationships have helped Accenture to consistently bring new clients into the fold and have driven predictable revenue growth for many years.

ACN Revenue (Annual) Chart

ACN Revenue (Annual) data by YCharts.

A great corporate culture

As a people-focused business, Accenture's long-term success hinges on its ability to attract and retain top talent. Thankfully, this is an area in which the company appears to shine. Last year, Accenture came in 60th place in Fortune's "100 Best Companies to Work For" list. This wasn't a fluke, either, as the company has been featured on the list for 10 consecutive years.

A look at the company's Glassdoor ratings shows that the business gets good marks from employees, too. Accenture gets 3.8 stars out of 5, and 78% of respondents would recommend the company to a friend. CEO Pierre Nanterme boasts a 93% approval rating and was ranked a Top 100 CEO in Glassdoor's annual list.

Moving into "the New"

While Accenture will continue to offer its clients a range of services, it is hyperfocused on building its expertise in three huge technology areas: digital, cloud, and security. Accenture's management refers to these growth areas as "the New," and they are investing heavily to ensure that the company remains the go-to consultant for each. In 2017 alone, the company spent $935 million in learning and professional development training, with an emphasis on the New. Accenture also makes regular use of tuck-in acquisitions to add talent where needed. Last year, Accenture spent $1.7 billion on 37 transactions in an effort to continue to ramp up its capabilities in these key service areas.

Accenture has the numbers to prove that these investments are paying off. Revenue from digital, cloud, and security services grew 30% to $18 billion last year and accounts for more than half of total revenue. That helped drive overall revenue growth of 7%, which is quite a dent given the company's gargantuan size. Management expects that the trend will continue, since each of these areas is becoming increasingly important to its clients.

Taking care of shareholders

Consulting is an asset-light business -- you don't need big factories or lots of equipment to hold meetings and give presentations -- so Accenture is a true cash-gushing machine. In 2017, the company cranked out $4.5 billion in free cash flow and returned the majority of it to investors. Last year, Accenture boosted its semiannual dividend by 10% and spent $2.65 billion on buybacks.

Management has been sharing the wealth with investors for a long time, too:

ACN Dividend Chart

ACN Dividend data by YCharts.

At current prices, Accenture offers investors a dividend yield of 1.6% that consumes less than half of profits. In other words, there's plenty of room left for future hikes even if profits don't grow.

Expensive but worth it

The biggest knock against Accenture is that Wall Street is aware that this is a solid business and has priced shares accordingly. The stock is currently trading for 24 times next year's earnings, which represents a premium to the S&P 500 in general. That's also quite pricey when considering that analysts expect profits to grow by only 10% annually over the next five years.

In spite of its valuation, I think that Accenture is still a fantastic stock to buy and hold for the long term. Adding in a fast-growing dividend yield of 1.6% to the picture only acts as icing on the cake.

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Stocks Mentioned

Accenture plc Stock Quote
Accenture plc
ACN
$279.64 (0.12%) $0.33
HP Inc. Stock Quote
HP Inc.
HPQ
$35.57 (2.30%) $0.80
Oracle Corporation Stock Quote
Oracle Corporation
ORCL
$69.83 (1.16%) $0.80
Microsoft Corporation Stock Quote
Microsoft Corporation
MSFT
$262.52 (1.12%) $2.90
salesforce.com, inc. Stock Quote
salesforce.com, inc.
CRM
$159.65 (1.73%) $2.72
SAP Stock Quote
SAP
SAP
$97.32 (-1.40%) $-1.38

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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