Cognizant Technology Solutions (CTSH) began operations in 1994 as an in-house technology development center for U.S-based Dun & Bradstreet with operations in India, notes Ingrid Hendershot, value-oriented money manager and editor of Hendershot Investments.
Over its first 25 years, Cognizant has successfully guided its clients around the world as they have moved from the mainframe-era to building end-to-end digital businesses.
Sensing and responding to market needs enabled the company to grow from a 200-person information technology firm focused on software development and maintenance in 1994 to a Fortune 200 company and a digital leader employing more than 270,000 worldwide today.
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Cognizant has grown to become a leading provider of information technology, consulting and business process outsourcing services dedicated to helping the world's leading companies build stronger businesses.
Cognizant’s expertise lies in technology areas, such as artificial intelligence, augmented reality, automation, autonomous products, cybersecurity, cloud, cognitive computing, IoT, robotics, sensors and instrumentation and virtual reality. Cognizant continues to deepen their expertise in 20 different industries, including banking and financial services, healthcare, manufacturing and retail.
For the full 2018 year, sales increased 8.9% to $16.1 billion with net income up 40% to $2.1 billion and EPS up 42% to $3.60. Return on shareholders’ equity for the year was 18%. Free cash flow increased 4% to $2.2 billion during the year with the company paying $468 million in dividends and repurchasing $1.26 billion of its common stock.
Over the past five years, the company has repurchased a substantial $4.4 billion of its common stock. Cognizant ended the year with $4.5 billion in cash and investments and $736 million in debt on its strong balance sheet.
In 2019, management expects revenue growth of 7% to 9% in constant currency with adjusted operating margin of 19% resulting in adjusted EPS of $4.40.
Cognizant’s capital deployment plan is to utilize about 50% of global free cash flow annually for dividends and share repurchases. The company plans to maintain a dividend payout ratio of about 20%, while reducing their outstanding share count by about 1% annually.
In addition, approximately 25% of their annual global free cash flow is to be used for acquisitions that enhance their longer term strategy of enriching their digital capabilities, expanding their geographic footprint and enhancing their vertical expertise.
The company’s planned capital return program will be funded by current U.S. cash balances, future cash flows from U.S. operations and incremental debt financing if necessary.
Long-term investors should be cognizant of Cognizant Technology Solutions, a high-uality industry leader with a solid capital deployment plan which includes steadily growing dividends and substantial share repurchases. We rate the stock a buy.
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