Cognizant: First at the starting line

Nasdaq-listed information technology (IT )solutions and services firm Cognizant Technology Solutions’ share repurchase programme of $3.4 billion over the next two years has proved a precursor to the buyback programmes announced by some of the Indian IT players.

While Cognizant has been repurchasing its shares from time to time, this is the first time the company will also give dividends to its shareholders. Cognizant will give out a regular quarterly cash dividend of $0.15 per share from the second quarter of 2017 (April-June).

Cognizant, during the third quarter (July-September; Q3) of 2016, had stated it had repurchased just over 2.5 million shares for a total cost of $145 million and their diluted share count decreased to 608.5 million shares for the quarter. “As of the end of Q3, we had repurchased 48.8 million shares for a total cost of $2 billion under our stock repurchase authorisation of $3 billion,” said the company during the analyst call.

Read our full coverage on how IT firms have used their cash pile

Unlike Indian IT services players, Cognizant has been much more aggressive in its acquisition drive. Since 2002, Cognizant has acquired a total of 27 firms. In 2016 alone, it announced four acquisitions. The company at the end of the December quarter of 2016 had approximately $5.2 billion of cash and short-term investments.

 

The company’s management has also reiterated that even after the share repurchase programme, the company will actively look for acquisitions. Francisco D’Souza, chief executive officer, Cognizant during the analyst call said that while tuck-in acquisitions, which get merged in a particular division of the company, will be its focus. The pace of acquisitions will continue to be at the same level as 2016 or even a bit ahead of that. 

 

Malcolm Frank, vice-president, marketing and strategy, Cognizant, also said the company would look at scale acquisitions like TriZetto too. “Our M&A (mergers and acquisitions) philosophy has not changed, we acquire for capability and not size. So, you will see us doing string of pearls strategy. Some of the acquisitions that we have done fit that strategy. We have modelled in that a couple of scale acquisitions. Scale acquisitions would be something like TriZetto. But you should view us as going after smaller digitally-focused firms. We can afford that,” he said. 

Other than focusing on tuck-in acquisitions, Cognizant has also taken bold bets like when it acquired TriZetto, provider of health care IT services and solutions for $2.7 billion in an all-cash deal in 2014. The transaction used combination of cash on hand and debt. The company had secured $1 billion of committed financing in support of the transaction. 

However, analysts believe even if Cognizant gives dividend of $0.15 per share and further does a share repurchase, it will not be a huge drain for the company. “The one per cent dividend is probably just a start and really is not a huge cash drain for a company like this. The overall share repurchase plan is a bit more aggressive in terms of cadence than prior plans. Still, a share buyback that is $3.4 billion in aggregate over the next two years can readily be funded by the company’s operating cash flow. The programme, at current share prices, would reduce outstanding shares by around 10 per cent,” said Bert Hochfeld of Seeking Alpha in his report.

The dividend payment of $365 million is an extremely modest pay-out ratio of less than 20 per cent. Shareholders are not likely to get rich out of the new capital return programme, Bert adds. Clearly, the Street expects more from Cognizant, which seems to be a fair expectation, given the slowing growth rates, especially in profits, and the sharp fall in the return on equity, in the last three-four years.