Cognizant to Return $3.4 b to Investors in Two Years
Co bows to shareholder demand, rival Indian outsourcing firms likely to follow suit
Jochelle Mendonca & Neha Alawadhi
Bengaluru | New Delhi: Information technology services company Cognizant will return $3.4 billion to shareholders through a share buyback programme and a dividend, as the US-based company accedes to demands by one of its investors — hedge fund Elliott Management — in a move that could trigger calls for similar action from Indian outsourcing firms.
Cognizant, which is aiming to deliver stronger operating margins, will also change the composition of its board. Three existing members of the board will not stand for re-election. To replace them the company will add three new independent directors, one of whom will be nominated by Elliott.
“We are pleased to be working with Elliott and look forward to welcoming new colleagues to the board. In addition, as part of today’s full-year earnings release, we announced a plan to accelerate our shift to digital, expand margin targets and launch a robust new capital return programme,” Francisco D’Souza, Cognizant’s chief executive officer, said in a statement.
In November, Jesse Cohn a senior portfolio manager at Elliott sent a letter to the IT company’s board asking it to shake up its board, raise its buyback, initiate a dividend to boost its share price and take steps to boost its margin. The hedge fund disclosed a 4% stake in Cognizant.
“Cognizant must continue to invest for growth and the digital transition, while further optimising operations and returning capital to its shareholders. We are large shareholders of Cognizant because we believe the Company has a strong position in the industry and can deliver compelling value to shareholders,” Cohn
said in the statement.
ET has previously reported that Elliott’s letter to Cognizant has sparked a flurry of similar requests being sent to Indian IT firms, which are also now facing demands from both domestic and institutional investors for buybacks of shares.
The outsourcing industry has seen a steady dip in growth in recent times. The National Association of Software and Services Companies has cut the industry’s growth target for fiscal 2017 to 8-10% from 10-12% for the same year, as the industry also grapples with the growing threat of protectionism in its biggest market in America.
IT services firm Mindtree has already sa- id it is considering options, other than dividends to boost shareholder returns.
Cognizant’s board has also approved a plan to return $3.4 billion to shareholders over the next two years through a combination of share repurchases and dividends.
As part of this plan, Cognizant said it would 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. The company said it would return 75% of its free cash flow to shareholders by 2019. “The management has committed to expand margins and return cash to shareholders (in line with activist Elliott's plan); we view the stock as good value,” David Koning, analyst with US brokerage RW Baird, said in a note.
The US-listed IT firm has also said it will target a 22% non-GAAP operating margin in 2019, up from its historical 19-20% band. The non-GAAP operating margin for the quarter ending December 31, 2016 was 18.7%.
Cognizant said it would focus on high value services and pass on deals that would be less profitable. The company will also boost utilisation and automation to expand its margins.
“Last year, we re-organised how we did business into three service lines and that helped us simplify the company. That is going to help us take out some of the redundancies that may exist,” Rajeev Mehta, president of Cognizant, told ET.
The Teaneck, New Jersey-headquartered firm said its strategy of hiring more people onshore and current industry pricing trends would mitigate some of that margin expansion.