Almost a year ago, security company ADT Corp. (UNKNOWN:ADT.DL) released a disappointing quarterly report that tanked its valuation. Slowing customer growth and a decline in net income caused the stock to fall roughly 24% over a six-day stretch. Subsequent earnings reports gave reason for a more positive outlook on the company's future, and shares are currently up roughly 22% from the lifetime low ADT's valuation hit in March 2014.
Even so, the company's stock is still down 8.3% from its market debut and split with former parent company Tyco International, while the S&P 500 has gained roughly 41% over the period. Across the same stretch, ADT's market cap has fallen 26.8%, and shares outstanding have been reduced 24.7%.
ADT is set to publish first-quarter results on Jan. 28, and in the lead-up to the earnings release, it's worth taking a look at some factors that could drive the company's stock higher. There's no surefire guarantee that ADT's share price will increase, but these three elements could be a boon for the company and its investors.
Subscriber rates for ADT Pulse could see large, sustained increases
ADT's home automation system, Pulse, stands as one of the company's most important opportunities for top- and bottom-line growth. Pulse currently allows users to view surveillance footage, control lighting, and arm or disarm security systems remotely. Some analysts project that ADT has the potential to be a major beneficiary of the pending Internet of Things revolution. If the company could enroll a substantial percentage of its customer base in Pulse subscriptions, it would be well positioned to supply additional features as IOT technology develops and becomes more mainstream.
New competitors such as Time Warner Cable, Comcast, and AT&T as well as and looming threats from Google may dull that potential competitive edge, but Pulse remains a key business for ADT. In 2014, the company announced a partnership with Ford to make Pulse compatible with the automobile manufacturer's SYNC AppLink, thereby enabling users to monitor and operate security features with voice commands while driving. If ADT manages to meaningfully increase Pulse integration and can drive customer enrollment, sales and the bottom line should increase. The company's 3% annual revenue growth in fiscal 2014 wasn't impressive, but its 1.8% increase in average revenue per customer was bolstered by new Pulse subscriptions, and future gains will be affected by the service's momentum.
ADT could establish a history of reliable dividend raises
Earlier this month, ADT raised its dividend payout to $0.21, an increase of 5%. The company's payout has increased its dividend 68% since it first began issuing a dividend at the end of 2012, and the stock currently has a dividend yield of 2.4%. Given the aggressive raises over a relatively short period of time, it's clear that ADT is hoping to entice investors by making its dividend an attractive component of its stock. The company's payout ratio sits at about 43.4%, so it still has some room to raise its dividend, particularly if it makes additional large buybacks.
While cementing a reputation for a dependable dividend would certainly add an appealing element to ADT's stock, the company needs to improve its business in order to make sustained payout increases feasible. Fiscal 2014 saw ADT's free cash flow fall 45.4%, operating income dip 10.3%, and net income decline 27.8%. The company also lists only $66 million in cash and roughly $5.03 billion in long-term debt as of Sept. 27, 2014.
ADT could bolster its business outside the United States
ADT's business currently only operates in the United States and Canada. Among those geographic segments, roughly 94% of the company's $3.4 billion revenue in 2014 came from the U.S.. The recent $525 million purchase of Reliance Protectron represents an attempt to improve ADT's presence in America's neighbor to the north, and if it winds up being successful in that broader pursuit, revenues could see a meaningful boost.
ADT might also benefit from attempting to build its business outside of its two main markets. Doing so might require purchasing brand rights from Tyco, which currently holds the rights to the ADT name in territories outside the U.S. and Canada, but such a move has the potential to benefit the company's business and stock if ADT's core markets look sound.
Keith Noonan has no position in any stocks mentioned. The Motley Fool and owns shares of Apple, Ford, Google (A and C shares). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.