Government Services Firms Seeking Ways to Drive Value
Despite downward budgetary pressures and a contracted spending environment, services firms continue to seek new ways to return value to shareholders. Services firms are employing a range of techniques to accomplish this from the traditional growth drivers including M&A, to less common tactics like the distribution of dividends.
Earlier this month Booz Allen announced a $1B special dividend, citing the attractiveness of current debt markets and effective use of the balance sheet. Exploring our government services comp set, Booz, SAIC, and ManTech all boast dividend yields in excess of 2%. Traditionally, dividends are reserved for lower growth companies whose business had matured to a level in which returning cash to shareholders trumped reinvestment (e.g., capex, M&A).
That said, we don’t interpret the dividend trend of these three government services firms as an indictment on growth opportunities in the federal space. These firms, consistent with their non-dividend paying peers, are also opportunistically pursuing acquisitions and taking advantage of ongoing low interest rates and available credit (often at the same time). The low capital expenditure and net working capital requirements of the services business model affords significant cash generation even in this down market. SAIC (maxIT Healthcare), CACI (Delta Solutions and Technologies), ManTech (HBGary; Evolvent), ICF (GHK Holdings), and Kratos (Ingersoll Rand Security Technologies) have all announced or closed deals thus far in 2012. Granted, the maxIT, and GHK deals were more commercially focused and evidence a diversification strategy.
The key however, is that with looming sequestration, upcoming elections, and an ever tenuous budget environment, the industry bell weathers are not hoarding cash like during the 2008 downturn, but continue to proactively seek ways to reposition and drive value. Bottom line, the credit and M&A markets remain open and active for government services firms, and we anticipate that to continue for the remainder of 2012.