ABM Industries: Below Average Business, Long Dividend Record

ABM Industries (NYSE:ABM) is a classic American business story in the janitorial industry. Originally founded in 1909 by solo entrepreneur Morris Rosenberg, ABM IPO’d in 1965 and is now a leading, diversified services company. It’s now a very mature business in a generally slow-growth industry. They have grown mostly through acquisition and diversified their line of facilities services. Below shows recent M&A activity.

Revenue breakdown by segment follows:

The Moat

The company is successful insofar as growing to be one of the largest players in their respective industries. This doesn’t automatically give them a moat, however. Companies that inherently have low margins and low returns on capital can’t really have a moat in the truest sense. A moat implies that it surrounds a very valuable castle. This means high returns on capital or at least high margins. When there is neither, you don’t really have a moat since no one is motivated to capture such a castle.

ABM’s median gross margins for the past decade are around 10%. Operating and net margins sit at 2.9% and 1.8%. There’s no way to sugarcoat it, despite the size of the company and the level of importance to its customers, this is a below-average business with virtually no moat. The table below compares return metrics to competitors:

Company	10-Year Median ROE	10-Year Median ROIC	10-Year EPS CAGR	10-Year FCF/Share CAGR
ABM	7.2%	5.2%	3.9%	10.86%
ECL	16.5%	8.1%	7.4%	10.21
EME	11.9%	9.8%	14%	9.11%
ARMK	13.6%	3.1%	2.57%	-158

Source

There should be some credit given for the general M&A strategy. While on one hand, the acquisitions as a whole didn’t increase earnings power enough to greatly outperform, they also used a mix of debt and dilution to fund these purchases which didn’t end up sinking the company. In spite of low ROC and margins, they beat the market over many longer-term time periods.

ABM also deserves some credit for remaining FCF positive throughout the pandemic. Net income basically broke even in 2020 as the pandemic hit this industry hard through no fault of their own. The trend to virtual work definitely hurts this business.

The board authorized around $144 million in share repurchases last year, but time will tell if the share count is actually decreased. Usually, they dilute to help fund acquisitions, so I wouldn’t count on them turning into aggressive buyers of shares anytime soon.

Dividend Growth

Perhaps the most appealing aspect of this stock is its record of dividend growth. They’ve raised the dividend 54 years in a row.

Don’t let this impressive dividend growth streak mislead you. This record doesn’t de facto make ABM a great business. It simply means earnings were stable and predictable enough to all but guarantee increased dividends each year.

For the dividend investor looking right now, the current yield is only 1.6%, not appealing enough for income seekers. This leads us to valuation.

Valuation

Shares of ABM hit an all-time high, but did it really deserve the price? Below is a relative price table and conservative DCF.

Company	EV/Sales	EV/EBITDA	EV/FCF	P/B
ABM	0.6	13.6	29.2	1.9
ECL	4.2	22	44.1	6.7
EME	0.5	8.1	18.5	2.5
ARMK	1.1	15.7	-200.5	3

Source

The DCF is admittedly very conservative, but I don’t see how to expect returns to even be average at these levels. Even though acquisitions will continue, this is not a stock for growth investors. For dividend investors, the share price offers a low dividend yield right now, but even if the share price is cut in half, there are better options out there for income investors.

Conclusion

ABM recently hit an all-time high share price, and it has an impressive track record of dividend growth. Despite a long history of growth by acquisition, the margins and returns on capital speak for themselves, ABM is a below-average business. There is no reason for the long-term growth investor to own ABM on a qualitative basis. Dividend investors should also avoid at current levels, since the current yield is lower than the 10-year after all. There are much better choices out there for dividends. ABM has been a long-term success from the perspective of a one-person operation growing into a multinational service company. Looking forward though, this stock doesn’t have much to offer right now.