There are so many opportunities in life.
People tend to underestimate how many opportunities they really have in front of them.
However, these opportunities aren’t limitless.
And time is always in short supply and only running shorter as the clock ticks away.
This brings me to dividend growth investing, which is a phenomenal long-term investment strategy which prioritizes buying and holding shares in world-class businesses paying out safe, growing dividends to shareholders.
There are hundreds of stocks that qualify for this strategy, as you can see by perusing the Dividend Champions, Contenders, and Challengers list – a data-rich compilation of stats on US-listed stocks that have increased dividends each year for at least the last five consecutive years.
However, it’s not an unlimited number, and time is of the essence when it comes to putting money to work and getting the compounding process working in your favor.
This is something I, fortunately, figured out while I was still in my 20s.
I started applying the dividend growth investing strategy back then, allowing it to guide me as I went about building the FIRE Fund.
That’s my real-money portfolio, and it generates enough five-figure passive dividend income for me to live off of.
It’s actually been enough to live off of since I quit my job and retired in my early 30s.
Just about anyone can achieve something like this, as I spell out in my Early Retirement Blueprint.
However, one does have to pick their opportunities intelligently and get to work ASAP.
Speaking of picking opportunities intelligently, a major part of that involves valuation at the time of making any investment.
An undervalued dividend growth stock should provide a higher yield, greater long-term total return potential, and reduced risk.
This is relative to what the same stock might otherwise provide if it were fairly valued or overvalued.
Price and yield are inversely correlated. All else equal, a lower price will result in a higher yield.
That higher yield correlates to greater long-term total return potential.
This is because total return is simply the total income earned from an investment – capital gain plus investment income – over a period of time.
Prospective investment income is boosted by the higher yield.
But capital gain is also given a possible boost via the “upside” between a lower price paid and higher estimated intrinsic value.
And that’s on top of whatever capital gain would ordinarily come about as a quality company naturally becomes worth more over time.
Undervaluation introduces a margin of safety.
This is a “buffer” that protects the investor against unforeseen issues that could detrimentally lessen a company’s fair value.
It’s protection against the possible downside.
Zeroing on a limited number of opportunities by focusing on undervalued high-quality dividend growth stocks as soon as possible in life can unlock amazing outcomes, including financial freedom at an early age.
Of course, separating out those undervalued ideas first means one already understands what to look for.
For anyone unfamiliar with the ins and outs of valuation, Lesson 11: Valuation is definitely worth a careful read.
Written by fellow contributor Dave Van Knapp, it discusses valuation using very simple terminology and can help just about anyone develop the skills necessary to estimate the value of businesses.
With all of this in mind, let’s take a look at a high-quality dividend growth stock that appears to be undervalued right now…
Accenture PLC (ACN) is an Irish-American global IT services and consulting firm.
Founded in 1951, Accenture is now a $109 billion (by market cap) consulting giant employing nearly 800,000 people.
The company reports results across five operating groups: Products, 30% of FY 2025 revenue; Health & Public Service, 21%; Financial Services, 18%; Communications, Media & Technology, 16%; and Resources, 14%.
Accenture can also be thought of as two separate types of work which both comprise about half of the company’s revenue base: Consulting (short-duration contracts regarding strategies), and Managed Services (long-duration contracts regarding ongoing operations).
Sales are roughly split 50/50 between the Americas and the remainder of global markets.
As one of the largest IT services companies in the world, Accenture provides a range of consulting, strategy, technology, operational, and outsourcing services to its thousands of clients across 40+ different industries located in 120+ different countries.
With enterprise problems being more complex than ever, Accenture’s expertise and services become more valuable than ever.
That complexity is no better illustrated than through the development of AI, which has opened up all kinds of new opportunities and challenges for companies and workforces globally.
While AI could be seen as a huge hindrance to Accenture’s ability to gain clients, grow, and register billable hours (due to AI’s growing capabilities), it could also be seen as a chance for Accenture to provide even more value by expanding AI-enhanced offerings (which the company is doing through AI-native acquisitions and by pivoting toward agentic services).
Additionally, with almost 800,000 employees on payroll (that’s an army’s worth of people), Accenture could likely implement AI internally to run much leaner.
With a viable path for more revenue and less expenses opening up, that positions Accenture to quite possibly accelerate its profit and dividend growth over the coming years – not in spite of, but because of, AI.
Dividend Growth, Growth Rate, Payout Ratio and Yield
That could be great news, as Accenture has already increased its dividend for 21 consecutive years.
Its 10-year dividend growth rate is 11.1%, which is strong, but what really stands out is how consistent Accenture has been in this regard.
Its five-year dividend growth rate is 13.1%, and the most recent dividend increase came in at 10.1%.
We’re talking about clockwork-like double-digit dividend raises here.
You’re not going to find a near-4% yield with double-digit dividend growth very often.
In fact, you almost never see it even on this stock.
This yield is more than twice as high as it usually is, and 220 basis points higher than its own five-year average.
Yet, with the payout ratio at 53.7%, the dividend is not unsustainable or suddenly unsafe.
Rather, a brutal downslide on the stock, which has driven the yield up as the price has fallen, has created this unusual situation regarding the yield.
For contrarian investors who like to go against the market, this is a very interesting idea.
Revenue and Earnings Growth
As interesting as it may be, though, much of this gets based on prior information.
However, investors must always be thinking about the information that hasn’t come in yet, as today’s capital gets risked for tomorrow’s rewards.
As such, I’ll now build out a forward-looking growth trajectory for the business, which will be of use when the time comes later to estimate fair value.
I’ll first show you what the business has done over the last ten years in terms of its top-line and bottom-line growth.
I’ll then reveal a professional prognostication for near-term profit growth.
Lining up the proven past with a future forecast in this manner should give us the tools necessary to sketch out where the business could be going from here.
Accenture increased its revenue from $34.8 billion in FY 2016 to $69.7 billion in FY 2025.
That’s a compound annual growth rate of 8%.
Very solid top-line growth out of a large, mature company like this, although Accenture is quite active around M&A.
Accenture frequently pursues bolt-on acquisitions, acquiring smaller firms and taking on these employees to expand its capabilities and reach.
Meanwhile, earnings per share grew from $6.45 to $12.15 over this period, which is a CAGR of 7.3%.
Margins have been steady, and modest buybacks (reducing the outstanding share count by about 5%) helped.
While I’d like to see something better here – certainly a faster growth rate than that top-line 8% mark – this is just as much about a high starting point than anything else.
If you move the starting point one year back or forward, the result changes quite a bit.
Taking a larger view of things, Accenture appears to be doing high-single-digit (call it 9% or so) bottom-line growth over time, which is more befitting of an 8% revenue growth rate and fairly appropriate, if not slightly impressive, for a business of its size.
Still, I think a minor disconnect is starting to surface here, where the dividend is growing just a bit faster than the business itself.
That gap between HSD business growth and LDD dividend growth will have to reconcile at some point.
Looking forward, CFRA believes that Accenture will compound its EPS at an annual rate of 9% over the next three years.
In my view, based on what I just noted, that’s a continuation of the status quo.
Seeing as how Accenture’s stock is under an assault from market sentiment (but not actual results) regarding the AI threat, I’d consider a steady rate of 9% growth to be a win.
Diving in deeper on that, CFRA sees more AI opportunities than risks and highlights scale, expertise, leadership, and partnerships with major AI firms such as Anthropic and OpenAI.
The thing is, the market tends to shoot first and ask questions later.
A lot of damage has already been done, at least to the shares.
With Accenture’s stock down more than 50% since last February, a lot of the AI threat has already been baked in at this point (regardless of the fact that this threat hasn’t actually manifested in a sharp reduction in business).
Even if AI actually does harm Accenture’s business, the market has already anticipated that and cut the stock in half.
That means if Accenture really does have an opportunity here, the stock could rebound intensely over the next several years – all while shareholders also get to collect that near-4% yield growing at a rate well in excess of inflation.
Speaking of that, with CFRA calling for 9% EPS growth, I’d expect something similar for the dividend (reconciling the two growth rates).
With the yield being as high as it is, that’s a fantastic combination of income and growth.
Financial Position
Moving over to the balance sheet, Accenture has an outstanding financial position.
Its long-term debt/equity ratio is 0.2, while the interest coverage ratio is 40.
As great as these numbers are, they don’t tell the full story.
I say that because Accenture is sitting on net cash.
Accenture’s lofty, investment-grade credit ratings add more color to just how much financial strength is present: A+, Fitch; AA-, S&P.
Profitability is excellent.
Return on equity has averaged 29.4% over the last five years, while net margin has averaged 11.4%.
Accenture is able to generate very high returns on capital without employing a lot of leverage, as ROIC tends to track ROE pretty closely.
Fundamentally, Accenture is a very high-quality business.
And with economies of scale, deep expertise across multiple domains, brand power, contractual agreements, and switching costs, the company does benefit from durable competitive advantages.
Of course, there are risks to consider.
Litigation, regulation, and competition are omnipresent risks in every industry.
Competition in this space is fierce, and AI may very well be adding to the competitive pressure.
Speaking of AI, this is a rising risk with an unknown level of impact, as it’s too early to say how much of Accenture’s lunch AI can actually eat (and whether or not Accenture’s lunch becomes larger as a result of the incorporation of AI into its own operations), but it’s not unreasonable to say that AI could become an existential risk to Accenture.
The US government, one of Accenture’s customers, is heavily indebted and putting contracts under additional scrutiny, which could result in a loss of future business.
Being an international company, it has exposure to geopolitics and exchange rates.
There’s exposure to macroeconomics and economic cycles, as a major economic downturn would likely pressure IT spending, but Accenture’s diversified revenue model and contractual work combine to mitigate this.
I do see some serious risks to weigh, particularly in relation to AI.
However, a huge amount of risk (arguably more than ever) has already been front-loaded into the shares after a stunning 50%+ decline since last winter…
Valuation
That drop has compressed the P/E ratio down to 14.8.
To put that in perspective, the stock’s five-year average P/E ratio is 27.4.
And if you go back to before the pandemic, the stock was often over the 30 mark.
Was it simply too expensive before?
Perhaps so, but an earnings multiple of less than 15 in a broader market that’s closer to 30 seems to have boiled out all froth and then some.
The P/CF ratio of 8.9, which is shockingly low in isolation, is also way below its own five-year average of 17.6.
And the yield, as noted earlier, is significantly higher than its own recent historical average.
So the stock looks cheap when looking at basic valuation metrics. But how cheap might it be? What would a rational estimate of intrinsic value look like?
I valued shares using a discount model analysis.
I factored in a 10% discount rate and a long-term dividend growth rate of 7.5%.
This probably looks downright pessimistic when you line it up against the double-digit dividend growth of yore, but I already noted that there needs to be a reconciliation between EPS growth and dividend growth (since the former has trialed the latter).
We can see that Accenture compounded EPS at an annual rate of right about 7.5% over the prior decade, and I’m seeing that as a pretty good baseline from here.
Although CFRA is calling for 9% bottom-line growth over the near term, which I believe is realistic, there’s a lot of uncertainty and I wouldn’t mind Accenture being conservative around dividend raises as a result of that uncertainty.
I’m being ultra cautious here, but I think it’s appropriate to err on the side of caution with this kind of business model in this kind of environment.
The DDM analysis gives e a fair value of $280.36.
The reason I use a dividend discount model analysis is because a business is ultimately equal to the sum of all the future cash flow it can provide.
The DDM analysis is a tailored version of the discounted cash flow model analysis, as it simply substitutes dividends and dividend growth for cash flow and growth.
It then discounts those future dividends back to the present day, to account for the time value of money since a dollar tomorrow is not worth the same amount as a dollar today.
I find it to be a fairly accurate way to value dividend growth stocks.
Even with a conservative model, the stock still looks remarkably cheap to me.
But we’ll now compare that valuation with where two professional stock analysis firms have come out at.
This adds balance, depth, and perspective to our conclusion.
Morningstar, a leading and well-respected stock analysis firm, rates stocks on a 5-star system.
1 star would mean a stock is substantially overvalued; 5 stars would mean a stock is substantially undervalued. 3 stars would indicate roughly fair value.
Morningstar rates ACN as a 4-star stock, with a fair value estimate of $255.00.
CFRA is another professional analysis firm, and I like to compare my valuation opinion to theirs to see if I’m out of line.
They similarly rate stocks on a 1-5 star scale, with 1 star meaning a stock is a strong sell and 5 stars meaning a stock is a strong buy. 3 stars is a hold.
CFRA rates ACN as a 5-star “STRONG BUY”, with a 12-month target price of $335.00.
I landed right about in the middle. Averaging the three numbers out gives us a final valuation of $290.12, which would indicate the stock is possibly 38% undervalued.
-Jason Fieber
Note from D&I: How safe is ACN‘s dividend? We ran the stock through Simply Safe Dividends, and as we go to press, its Dividend Safety Score is 92. Dividend Safety Scores range from 0 to 100. A score of 50 is average, 75 or higher is excellent, and 25 or lower is weak. With this in mind, ACN’s dividend appears Very Safe with a very unlikely risk of being cut. Learn more about Dividend Safety Scores here.
P.S. If you’d like access to my entire six-figure dividend growth stock portfolio, as well as stock trades I make with my own money, I’ve made all of that available exclusively through Patreon.
Disclosure: I’m long ACN.