SAIC (SAI), which provides IT and engineering services to the DoD and other federal agencies, has announced a $1 special dividend to be distributed in June to all common shareholders. The special dividend has a yield of 7.5% at current market prices. This is a nice distribution for shareholders, and should ease concerns about sequestration. Management is signaling that even with budget cuts, the company will be fine.
Even sequestration, management has mentioned that backlog has not changed at all. The company ended the quarter with $17.9 billion in backlog, and has already received $5.4 billion of it. There has been no reduction in backlog so far with the budget cuts.
SAIC has already submitted bids on $24 billion worth of contracts. During Q4, the company won 8 contracts with more than a $100 million each. This does not include the $1 billion in classified intelligence programs.
So as we can see, budget cuts have not really made any dent for SAIC. FY 2014 EPS is expected to be $1.16-$1.33. The range is larger since management is being cautious about the $42.5 billion in defense cuts. However, I do believe that the company is likely to earn above $1.25 per share given the current backlog and the new bids that went out.
As for free cash flow going forward, cash flow from operations is expected to be $450 million for FY 2014. CapEx is only going to be 1% of operating cash flow. Therefore, free cash flow will remain well above $400 million. This is more than enough to cover the regular dividend of $164 million. The payout ratio to free cash flow is 41%
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