ABM Industries (ABM) — a favorite conservative investment idea for 2022 — fits squarely in the ‘boring, slow-changing business’ category, suggests Ben Reynolds, editor of Sure Dividend's Top 10 Dividend Elite.
The company provides ‘facility solutions’ including: janitorial services, facilities engineering, parking management, landscaping and grounds management, mechanical and electrical services, and vehicle maintenance.
The company was founded in 1909 and currently trades with a $2.75 billion market cap. Notably, the company is a Dividend King based on its 53 years of consecutive dividend increases.
ABM has generated solid business results in fiscal 2021 (the company’s fiscal year ends October 31st). Adjusted earnings-per-share came in at $3.58, above the high end of management’s guidance. For fiscal 2022, ABM’s management’s midpoint guidance is for adjusted earnings-per-share of $3.43.
Guidance is lower in fiscal 2022 versus the prior year due to an expected decline in COVID-19 disinfecting work. With that said, the company’s long-term growth rate over the last decade compounded at around 5% annually. And they managed to grow adjusted earnings-per-share every year from fiscal 2014 through fiscal 2021. While this may change in fiscal 2022, it still speaks to the company’s stability.
We believe ABM’s earnings-per-share will continue to compound at a rate of around 5% over the next several years, in-line with performance over the last decade.
Using expected adjusted earnings-per-share of $3.43 for fiscal 2022, ABM Industries is trading for a price-to-earnings ratio of 12.1. The company’s average price-to-earnings ratio over the last decade is around 17.5. It’s not unreasonable to expect the company to return to its historical average price-to-earnings ratio. If this were to happen, shareholders would realize 44% upside.
ABM stock currently trades with a 1.8% dividend yield. While this yield is certainly not high, it is above the S&P 500’s dividend yield of 1.3%. And with a payout ratio of just 22% of expected fiscal 2022 adjusted earnings-per-share and 53 years of consecutive dividend increases, future dividend growth is very likely.
ABM is a compelling selection for a conservative dividend growth style investment. The starting yield could be higher, but the company’s safety and potential valuation upside more than make up for the middling dividend yield.
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A Look Back at 2021's Top Performers
Last year, Ben Reynolds chose Home Depot (HD) as his Top Pick for 2021. The stock rose 56% over the past year. Here's his latest update on the company:
Through the first 9 months of fiscal 2021 (the most recent results for the company) versus 2020, revenue is up 15.6% and diluted earnings-per-share are up 32.7%. With strong business momentum, we see continued growth ahead for Home Depot.
While Home Depot should continue to post strong business results, the share price has grown even faster than the underlying business. As a result, we see Home Depot as somewhat overvalued currently. Our fair value target is $341 for this high quality dividend growth stock, while shares are currently trading at $415. This is why Home Depot isn't one of my top picks for 2022 as well.
