Dividend King ABM Industries (NYSE: ABM) is neither a high-profile stock nor an exciting investment, but that is not why it’s a good buy. A solid, in-demand business steadily growing and widening margins offset the lack of excitement. The margin is critical to this investment as it drives significant cash flow, allowing for self-funded expansion, ultra-safe dividends, distribution growth, and share repurchases. 

The quality of the investment is seen in its status as a Dividend King. This label speaks volumes regarding foresight, corporate discipline, and the ability to withstand the natural ups and downs of the business cycle. The takeaway is that ABM Industries is a high-quality cash flow machine that returns capital to investors while driving shareholder value, and it is on track to set a new high. 

ABM Industries Post Solid Quarter, Raises EPS Guidance

ABM Industries had a solid quarter, producing growth of 2% compared to last year. The $2 billion in revenue aligned with forecasts, which is not a catalyst for higher prices, but the margin is. The top-line growth was driven by a double-digit gain in three of the four operating segments, offset by a small single-digit decline in the office category. Office-related revenue is down due to sluggishness in the industry but offset by margin improvement and earnings quality. Critical details include all-organic growth driven by new and existing business. 

The margin news is mixed but favorable to shareholders. The GAAP and adjusted margins are down compared to last year due to a one-off in the prior year and an expected increase in spending/CAPEX. The salient point is that the adjusted $0.82 in earnings is down 3% compared to last year but a full 1000 basis points better than the consensus forecast reported by MarketBeat.com. The earnings strength led management to increase the guidance, which catalyzed higher share prices. 

Guidance for the year is good. The company expects low-single-digit growth, but the Q2 margin strength increased the EPS target. The adjusted EPS target was raised by a dime at the low end and $0.075 at the midpoint, above the analysts' consensus. This led to some upward revisions to the outlook and price targets that support the market. MarketBeat tracks four revisions since the report was released, all of which include upward movement in the price target. The consensus of the four new targets is near $50.50, leading the group to the high end of the target range and the stock price to the high end of its trading range. 

Cash Flow and Balance Sheet Point to Sustained Capital Return

The company’s GAAP and adjusted margins were impacted by spending and one-offs from the previous year, but cash flow and free cash improved. Cash flow is up more than 4x and free cash flow more than 5x, allowing for significant share repurchases and dividend payments. The repurchases in Q2 helped to reduce the average count by 4.7% compared to last year. There is still ample funding left under the current authorization, enough to sustain repurchases for eight quarters at the Q2 pace, which plays into the dividend outlook.

Fewer shares reduce the company’s distribution total, allowing for sustained annual increases with or without earnings growth. Regarding the balance sheet, highlights include flat assets, a reduction in debt/liabilities, and a 2.5% increase in equity. Net leverage remains low at 2.3x net, leaving the company in a nimble operating condition to invest in growth and margin-enhancing activity. 

Range-Bound ABM Industries Heading for the Upper Limits

ABM stock has been range-bound for nearly four years as the market digested the social-distancing and COVID-19-inspired gains. With the industry back to organic growth and cash flow rising, the stock is heading to the top of the range with momentum, and it looks like it could retest the upper boundary soon. The caveat is that resistance at $52 could be strong. This level coincides with the high end of the analysts' target range and may cap gains over the next quarter or two. However, assuming the company continues to grow steadily, widen its margin, and repurchase shares as expected, the market should drive this business services stock to a new high by the end of the year.