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Why Elliott Management Wants Cognizant to Increase Its Shareholder Value

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Cognizant could easily increase shareholder returns

According to activist hedge fund Elliott Management, Cognizant Technology Solutions’ (CTSH) annual revenues of $13 billion, coupled with annual cash flows of $1 billion and the $4 billion in cash on its balance sheet, should provide the firm with an opportunity to return cash to shareholders in the form of dividends and share buybacks.

Cognizant has returned the lowest level of cash flow to investors, as compared to peer companies, since 2010. While Accenture (ACN) has returned 102% of free cash flow to shareholders, Cognizant has just returned 29% in free cash flow. The figure for India IT services giants Tata Consultancy Services, Infosys (INFY), and Wipro (WIT) stand at 67%, 53%, and 45%, respectively.

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Peers’ considerable shareholder returns

Cognizant does not currently provide dividends to investors. By comparison, the dividend yield of companies such as IBM (IBM), Infosys (INFY), and Accenture stand at 3.4%, 2.6%, and 1.9%, respectively.

In its recent letter to Cognizant, Elliott stated: “Cognizant has historically returned the lowest level of cash flow to shareholders while accumulating the highest level of cash flow on its balance sheet. Also, and perhaps most notably, Cognizant is the only large-cap IT service provider which does not maintain a dividend. This is a particularly unique fact given Cognizant’s scale and positioning.”

Elliott Management believes that improvements in profit margins and capital returns will create an upside potential of at least 50% for Cognizant stock.

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