Cognizant to return $3.4 bn to shareholders

Firm opts for dividends for first time; total share repurchase to touch $5 bn

Nasdaq-listed information technology (IT) services and solutions firm Cognizant Technology Solutions on Wednesday announced it would return $3.4 billion to shareholders over the next two years, though share repurchases and dividends.

At the end of this repurchase, it would have returned $5 billion to shareholders.

The share repurchase programme comes after hedge fund activist investor Elliott Management disclosed last year that it holds 4% stake in Cognizant. It urged the company to shake up its board, to reconsider a share-repurchase programme, including dividends, to improve the share price of the company.

This is not the first time that the company has repurchased its shares. Cognizant, during the third quarter (July-September), had said they had repurchased about 2.5 million shares for $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.

The company has in the past also used the share buyback platform. It is for the first time that Cognizant will be giving back shareholders via dividends.

“As part of this plan, the company expects to commence a $1.5-billion accelerated share repurchase program (ASR) in the first quarter of 2017, initiate a regular quarterly cash dividend of $0.15 per share commencing in the second quarter of 2017, and repurchase shares of $1.2 billion in the open market during 2017 and 2018,” said the company in a statement. 

Beginning in 2019, the company plans to return approximately 75% of its US free cash flow on an ongoing basis to shareholders through a combination of dividends and share repurchases. 

The capital return plan will be funded by its current US cash balances, future cash flows from US operations and incremental debt financing, and is designed to preserve the company’s financial flexibility to invest in future growth opportunities. 

“We are pleased to announce a comprehensive program that will enhance total shareholder return for Cognizant. Today’s actions reflect the board’s confidence in the company’s long-term strategy, which will drive sustainable revenue and earnings growth and greatly accelerate capital return,” said Karen McLoughlin, chief financial officer, Cognizant.

The share buyback programme may compel Indian IT services players such as TCS and Infosys to also consider it. “Cognizant might compel a company such as Infosys to consider harder the buyback shares. Large players such as Accenture have been more aggressive in terms of returning cash as well as acquisitions. Looking at both these examples, I am sure the management and boards of these companies will see increased pressures from shareholders to take action,” said a senior analyst from a leading domestic broking firm. 

Madhu Babu, IT analyst at broking firm Central Capital, said: “With growth now slowing down in the sector and 8-9% being the new normal, there is no reason to keep rolling the cash. In the past three years, absolute return has not been there in the IT stocks, be it TCS or Infosys. That is why investors are pressuring for a higher dividend which makes sense because when you do a tender offer based buyback it is just like giving a dividend on a promotional basis to the holders and that will improve the ROE for the sector and the EPS will also improve since the share counts will come down. The pressure on the management will keep increasing, especially on the context of the domestic economy where other sectors are doing well and It stocks are not giving returns.” 

In a report by Kotak Institutional Equities, the firm had stated that despite Infosys current focus on acquisition, its current cash pile allows for a buyback programme. “Infosys’ current cash balance (US$5.4 billion as at the end of September 2016) is adequate to meet acquisition target and capex of next three to four years. We believe Infosys can afford to increase payout at about 80-85% of net profits through buyback and dividends. Higher the allocation to buyback the better it is. We also believe that TCS can have a nice kicker to earnings through a structured buyback program,” said Kawaljeet Saluja and Jaykumar Doshi of Kotak in their report.

Payback time

Cognizant to return $3.4 bn to shareholders 

Time frame:  2 years

Routes for payback

Dividends and share buyback

Dividends
 

(I) Company opting for this route for the first time
 

(II)Regular quarterly dividend of $0.15 a share from Q2 CY2017
Share buyback 

(I) Accelerated share repurchase of $1.5 billion from Q1 CY2017
 

(II) To repurchase shares worth $1.2 billion in the open market in 2017 

and 2018
 

(III) To return 75% of US free cash flow