"What's the point of having the best technologies -- and living in the world we are living in -- if we are not joining forces to make this world better?"
-- Pierre Nanterme (1959-2019), former Accenture CEO
Ireland's Accenture plc (ACN 0.19%) is one of the largest IT consulting and outsourcing companies in the world. It employs 477,000 people in 50 delivery centers and 100 innovation facilities, serving clients in 120 different countries. A truly global company, 57% of Accenture's sales were generated outside of the U.S. in fiscal year 2018. Accenture generated $40.8 billion in sales, $4.47 billion in net income, and $5.9 billion in free cash flow (FCF), in the last 12 months. Accenture possesses the 32nd most valuable brand on the planet, according to BrandZ.
Despite having a $120 billion market capitalization, Accenture has only captured a 4% market share of the $1 trillion global IT services industry, so it has a long runway to grow both organically and through acquisitions. The company possesses another competitive advantage: it's a leader in environmental, social, and governance (ESG), which is an investing strategy employed by investors seeking to align their portfolio with their values. Nanterme, the late CEO, was a business visionary who created a culture that prioritized ESG, and the company is continuing this legacy of being a leader in ethical business under current CEO David Rowland.
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Accenture has racked up a variety of accolades for being a well-run, stakeholder-friendly company including Fortune's World's Most Admired Companies (16 consecutive years), Ethisphere's World's Most Ethical Companies (12 consecutive years), and CR Magazine's 100 Best Corporate Citizens (10 consecutive years).
Accenture possesses many of the ESG attributes we seek in publicly traded companies based on The Motley Fool's ESG Compounder Checklist, which is the framework guiding our ESG evaluation. Institutional investors also have a great deal of conviction in Accenture's sustainability; it's part of the Dow Jones Sustainability Index North America, as well as the FTSE4Good Global Index -- two indexes that were designed with ESG investors in mind.
First and foremost, Accenture has a detailed sustainability report that utilizes Global Reporting Initiative (GRI) standards, and Accenture has also aimed to fulfill the 10 Principles of the United Nations Global Compact (UNGC), which focuses on improving sustainability performance. And with that, let's analyze Accenture using our 10-question ESG framework.
1. Does the company treat its employees well?
Yes. Accenture's positive culture and accolades in this area make it a "magnet for top talent," which is a win-win-win for employees, the business, and investors.
One of Accenture's major claims to fame is that it has put equality at the top of its to-do list, creating bold goals to foster diversity within its workforce. One reason why Accenture has been named to Fortune's annual list of Best Companies to Work For for the 11th consecutive year. In Accenture's identification of non-financial materiality matrix, the company includes Talent Attraction & Development and Employee Well-being as areas of "Very High" impact to its business.
2. Is the company a good steward of the environment?
Yes. Accenture has goals and plans in place to address environmental concerns. Its latest sustainability report revealed a new science-based target to reduce absolute greenhouse gas emissions by 11% from its 2016 base year. In fiscal 2018, it achieved more than a 5% reduction largely due to increased use of renewable energy and reductions in air travel.
The company not only reports to CDP (formerly Carbon Disclosure Project) on its greenhouse gas emissions, but that it's also an "A List," top-performing company for the fourth time since 2014. In addition, Accenture is working to enable sustainability with its clients and suppliers.
3. Does the company promote diversity and inclusion?
Yes. In Accenture's disclosures, it identifies Inclusion, Diversity, and Equal Opportunity as "very high" in its non-financial materiality matrix, and it appears to be firing on all cylinders in that area. Most striking is Accenture's goal to achieve a gender-balanced workforce with 50% women and 50% men by 2025. By the end of 2018, Accenture's workforce consisted of 42% women, so it's working to achieve this goal.
Demonstrating Accenture's leadership in diversity and inclusion, the company is ranked number No. 1 on Thomson Reuters' Diversity & Inclusion Index, is part of Bloomberg's Gender-Equality Index, and has achieved a perfect score on Human Rights Campaign's Corporate Equality Index every year since 2008.
4. Does the company have ethical corporate governance principles?
Yes. Accenture possesses many of the building blocks for good corporate governance. It has majority voting for directors, an unclassified board (a classified board is when boards are split into separate classes to be voted on each year, making it more difficult to vote a weak board out all at once), and it has proxy access, which makes it easier for shareholders to provide their own nominations for the board of directors. With the exception of the CEO/Chairman role, the board is 100% independent, which means directors come from outside the company. In addition, Accenture has a diverse board; 36% of its directors are women, and it boasts 55% ethnic diversity.
Accenture utilizes pay for performance, which incentivizes leadership to steer the company in a good direction. Executive pay is devised not only from financial metrics, such as revenue growth, operating margin, earnings per share, new bookings, and FCF, but it's also based on metrics related to factors within the business such as diversity in recruitment, advancement, and retention.
While Accenture uses appropriate performance metrics to devise CEO and executive pay, Nanterme's $22 million in compensation last year means Accenture had a CEO-to-worker pay ratio of 1,222-to-1, a very high ratio and an element to keep in mind.
5. Do the company's business model and its investments promote ESG principles?
Yes. This question doesn't apply to Accenture as much as it does to some other companies because it invests very little in physical assets and it primarily sells services rather than products. As a consulting firm with nearly a half million employees, its sales (top line) growth currently depends on its headcount growth. In other words, Accenture needs to grow headcount in order to grow sales, earnings, and cash flows, meaning its people are its greatest asset.
Capital expenditures are the outlays a company spends on physical assets like property, plant, and equipment. Accenture's long-term average capital expenditures-to-sales ratio is only 1.4%, which shows that this is not a company that depends heavily on capital to function. In fiscal 2018, Accenture only spent $619 million in capital expenditures, but it spent $925 million on employee training and development.
Accenture's average Research & development (R&D)/sales ratio is a low 2%. The company doesn't need to spend much on R&D, as it's primarily a people-focused business and is instead spending money to support its employees and its ability to deliver its services in a way that minimizes its environmental footprint. Accenture also devotes substantial cash to philanthropic activities around the world. One example of its philanthrophic efforts is a partnership with coding organizations that provides an hour of free coding to students around the world.
6. Does the company have a healthy balance sheet?
Yes. Accenture has roughly $4.5 billion in cash and just $24 million in total debt, meaning its net cash is about $4.4 billion (or $6.81 per diluted share ). Accenture's net cash makes up 16% of total assets. Its interest coverage ratio (EBIT/interest expense) is 288 and it has an A+ credit rating from S&P Global.
7. Can the company generate organic revenue growth supported by long-term tailwinds?
Yes. During his tenure, Nanterme architected a plan to shift more than 60% of Accenture's revenue to digital in about seven years -- a truly Herculean task!
Under his leadership, Accenture invested ahead of the digital curve, and now it has the widest service offering in the industry at a time when digital projects and their corresponding budgets are ballooning. The early seeds it planted have established Accenture as the far-and-away leader in digital consulting, creating a massive long-term growth tailwind. As proof, Accenture's higher-margin digital revenue surged 25% in 2018. During the last seven years, it developed and acquired the best talent and technologies, and created processes to deliver its solutions at scale across global industries.
The company recently received the most five-star ratings in Forbes' 2019 America's Best Management Consulting Firms. With more than 182 diamond clients (those spending at least $100 million annually), three-quarters of the Fortune 500 are Accenture clients, and 92% of the Fortune 100 are clients.
There's some serious sticking power, too: 97% of Accenture's top 100 clients have been clients for more than 10 years. Dan Davidowitz and Damon Ficklin of Polen Capital said, "the most telling statistic on the company's competitive advantage is that 70% of its revenue is sole-sourced. This means there is no RFP [request for proposal] or bidding process to win these projects; they go straight to Accenture."
Accenture is perfectly positioned to benefit from the digital revolution including digital marketing, cloud, automation, Internet of Things (IoT), data analytics, artificial intelligence (AI), cyber-security, and even blockchain. It has partnered with Amazon Web Services, Alphabet subsidiary Google, Microsoft, Oracle, Salesforce, SAP, WorkDay, and Apple. Accenture is the #1 Software as a Service (SaaS) IT service provider, as well as the leader in digital marketing through Accenture Interactive, which is "the world's largest provider of digital marketing services."
Accenture's revenue increased at a seven-year compounded annual growth rate (CAGR) of 6.5%. Over the next five years, Accenture should be able to grow revenue at a CAGR between 7% and 8%. Global IT services spending is projected to grow about 3% and Accenture should continue to take "significant market share" and grow at least double the industry average, which would spell 6% organic growth. On top of its organic growth, acquisitions should add roughly 1% to 2%, to bring the average revenue growth over the next five years between 7% and 8%.
8. Can the business generate growing FCF and sustain high ROIC?
Yes. Accenture's ROIC has fallen from awesomely and exceptionally high levels of 50% in 2015 and 2016, down to only exceptionally high levels 40% in 2017 and 2018. Falling ROIC is sometimes a red flag, but not in Accenture's case because its excess returns (or the spread between its ROIC and cost of capital) are still exceptionally high. Also, Accenture's digital acquisitions are diluting returns, but more importantly, the acquisitions have played a crucial role in propelling Accenture's business model shift, which has increased its relevance, its competitive moat, and its long-term growth profile.
Accenture will be able to maintain a high ROIC thanks to its asset-light business model (with seven-year average capital expenditures/sales of only 1.4%), a management team that excels at capital allocation, and because it benefits from several sources of competitive advantage including a globally trusted brand, global scale, high-switching costs, proprietary processes and technology, and a deeply rooted culture that prioritizes ESG. Digital moats are built around intellectual capital and if you're going to win in digital you need the best employees. Accenture's workplace culture and commitment to ESG makes it a "magnet for top talent," as its executives have said.
Accenture's FCF increased at a seven-year CAGR of 8.6%. Accenture's FCF per share (which is ultimately what investors are after) increased at a seven-year CAGR of 10.6%, because Accenture used buybacks to reduce shares outstanding by an average of 2% per year. Accenture's seven-year average FCF margin is 12.3%, and its seven-year average FCF conversion (FCF divided by net income) is 1.2, indicating that Accenture is an FCF machine with a high level of earnings quality. Impressively, Accenture's FCF margin has increased for the last five consecutive years and clocked in 13.7% in fiscal 2018.
If Accenture can generate revenue growth of at least 7%, then modest margin improvement plus continued share buybacks of roughly 2% per year, can lead to 10% long-term growth in FCF per share.
9. Is the management team focused on driving long-term profitable growth?
Yes. Accenture's second fiscal quarter in 2019 was its first earnings release following the passing of Nanterme, who nurtured a culture that prioritized ESG. He also orchestrated and led a massive business transformation in a short amount of time, all the while maintaining fantastic ROICs and improving operating (EBIT) margins. Accenture's EBIT margins increased every single year from 2011 to 2017, according to S&P Global. Accenture's 2018 EBIT margin of 14.8% was flat with 2017. Accenture thinks it can expand operating margins between 10 and 30 basis points annually.
Rowland had been Accenture's CFO and now serves as interim CEO. He has worked at Accenture for 35 years and served as the CFO for the previous six years. KC McClure was appointed to the CFO position. She has worked at Accenture for 30 years, most recently leading finance operations across all of Accenture's business. Both Rowland and McClure worked closely with Nanterme, and given their three decades at Accenture, they probably live and breathe Accenture's culture that prioritizes ESG and investing in long-term profitable growth.
10. Does the company have a medium- or lower-risk profile?
Yes. Accenture is not materially exposed to any of the risks listed in The Motley Fool's ESG Framework, so it receives a medium to low risk rating.
Additionally, Accenture is a remarkably stable and consistent growing business. Accenture's revenue has only fallen in two years going back to 1998, according to S&P Global. Accenture's revenue fell a very modest 7.7% in fiscal 2009 and only 0.1% in fiscal 2010, revenue declines that occurred during the global financial crisis, the worst economic disaster since the Great Depression.
A perfect 10
Accenture scores a perfect 10 out of 10 on The Motley Fool's ESG Compounder Checklist. Anyone seeking a solid ESG stock idea -- one that furthers the greater good and serves its stakeholders well (including shareholders) -- should consider adding Accenture to their watch list.
