URS Corporation recently announced its Capital Allocation priorities that include dividend payments and share repurchases, which are to be funded by free cash flow. The remaining cash would be used to fund organic growth and reduce debt. The board of directors approved returning $500 million to its shareholders by the end of fiscal 2015.
This move to return cash to its shareholders and reduce debt is in line with URS’ long-term opportunities to maintain its investment grade credit rating.
This apart, the Compensation Committee, which is part of the board, is also in the process of redesigning the company’s incentive programs for its senior employees to further align their performance incentives with the capital allocation priorities.
During the first half of 2013, URS generated $90 million in operating cash flow and returned approximately $125 million to its shareholders through share repurchases and dividends. Cash flow from operations increased by $70.0 million in the first half of 2013 compared with the same period in 2012. This increase was primarily driven by the timing of billings, collections and advance payments from clients on accounts receivables.
Prioritizing the capital allotment emphasizes management’s confidence in the company’s long-term business outlook. It is also expected to increase investors’ confidence; given the company’s commitment to generate value for its shareholders.
However, according to Moody’s Investor Service, this announcement by URS is a credit negative, although Moody’s mentioned that it will not affect the company’s current Baa3 rating and stable outlook. Moody’s noted that URS’s credit metrics are not very strong for an investment grade company in the engineering and construction sector.
URS Corporation is a leading provider of engineering, construction and technical services. URS currently has a Zacks Rank #3 (Hold). However, other companies that can be considered at the moment are ITT Corp. (ITT - Analyst Report), Kaydon Corp. and AO Smith Corp. (AOS - Snapshot Report). All three carry a Zacks Rank #2 (Buy).