Updated April 15, 2021 by Bob Ciura
Every year we individually review all Dividend Aristocrats. This is because we consider them particularly attractive stocks for investors with long-term dividend growth.
The Dividend Aristocrats are a select group of stocks in the S&P 500 with more than 25 years of consecutive dividend increases. For a full downloadable table of all 65 Dividend Aristocrats, plus some key financial metrics like value for money, click the link below:
The next Dividend Aristocrat in our 2021 streak is AO Smith (AOS). In October 2020, AO Smith increased its dividend for the 26th consecutive year. According to the company, it has increased its dividend at an average annual growth rate of over 22% for the past five years.
With a current dividend yield of 1.5%, AO Smith could be investors currently looking for a high income level such as: B. retirees, may not appeal. On the other hand, those looking for high-growth dividend growth might find the company more attractive due to its long history of regular dividend increases.
AO Smith is a leading global provider of energy efficient products and solutions. The company manufactures a wide variety of domestic and commercial hot water systems as well as products for water treatment and air purification.
The company is perhaps best known for its water heaters. The company operates in two geographically separate business segments:
Source: Investor Presentation
- North America (73% of sales)
- Rest of the world (27% of sales)
As you can see, the company has a strong international presence.
AO Smith has done very well over the past decade, largely thanks to the steady recovery of the global economy after the great 2007-2009 recession. From 2010 to 2020, revenue and adjusted earnings per share increased 7% and 18% per year, respectively.
Combined with margin expansion and share buybacks, AO Smith’s impressive top-line growth has also resulted in impressive earnings growth. The past year has been a setback for AO Smith due to the coronavirus pandemic that had a negative impact on the global economy. But here, too, the company has demonstrated its resilience by quickly returning to growth.
AO Smith repsorted his fourth-Quarterly results on January 28th. The company had sales of US dollars830 million during the quarter that represented an improvement of 11%. in comparison to the previous year quarter. Sales increased 7th%. in the North America, while rEvening growth was even higher in the rest of the world, especially in China as this is the company’s largest overseas market. MeritsThe $ 0.74 per share percentage for the fourth quarter increased 31% year over year.
For the year, revenue and adjusted earnings per share were each 3% lower than in 2020. Overall, the company developed relatively well over the course of the year.
A.Ö.Blacksmith has Likewise problematic Orientation aid for 2021. T.The company predicts profits– –Per– –Share in a range of $2.40 to $2.50, Which would reflect a significant earnings acceleration over 2020.
AO Smith’s US growth catalysts include continued economic growth and rising property prices. As a manufacturer of products for water heating, water treatment and air purification, the company depends on a financially healthy consumer and housing market.
When house prices are rising and unemployment is low, disposable income consumers are much more willing to invest in upgrades like new water heaters.
Outside the US, the company’s main growth prospects are in China and India, two major emerging economies with large populations and high economic growth.
Source: Investor Presentation
For the year 2021, AO Smith expects sales growth in China of 14% to 15% in local currency. The company also expects the Rest of World segment, which also includes India, to increase sales by more than 20%.
Emerging markets like China and India offer AO Smith great long-term growth opportunities.
We expect AO Smith to achieve earnings per share of 6% per year through 2026. We believe the company should at least achieve this level of growth based on organic sales growth and share buybacks.
Competitive advantage and recession performance
AO Smith’s strong growth is due to its competitive advantages, especially its highest market share. AO Smith has the largest market share in US water heaters. It holds over 30% of the domestic residential share and over 40% of the commercial market share.
Being at the top of the industry gives AO Smith pricing power and high margins. This in turn gives the company the opportunity to generate a lot of cash flow, which allows it to invest in new product innovations.
A potential risk for AO Smith is a recession. As a manufacturer, the company is closely linked to the health of the economy as a whole. It’s not a very recession-resistant business model.
Earnings per share during the Great Recession are shown below:
- 2007 earnings per share of $ 0.48
- 2008 earnings per share of $ 0.49, up 2%
- 2009 earnings per share of $ 0.57, up 16%
- 2010 earnings per share of $ 0.43 (down 25%)
- 2011 EPS of $ 0.60, up 39%
As you can see, the company did very well during the worst years of the 2008 and 2009 recession. The result slumped significantly in 2010, but recovered quickly in 2011. Overall, the company performed exceptionally well, as it was able to further increase earnings during the course of the recession.
Valuation and expected return
Based on the current share price of ~ $ 67 and the middle of the EPS forecast for 2021 ($ 2.45), AO Smith stock is currently trading at a P / E ratio of 27.6. We believe a price / win multiple target of 18 seems appropriate.
As a result, AO Smith appears to be overrated right now. If the P / E ratio decreased to the fair value estimate of 18, it would reduce the annual return by 8.2% over the next five years.
Shareholder returns are also boosted by earnings growth and dividends, which together add up to an annual return of 7.5%. Overall, a negative total return of 1.3% per year is expected. This is due to the significant increase in the P / E ratio compared to our fair value estimate.
AO Smith is an industry leader. It has the top brand in its category with impressive growth potential for the future. It has such a dominant market share in its industry that the company can continue to overcome short-term difficulties. In the long term, we consider the potential growth opportunities in emerging markets to be extremely attractive.
While the dividend yield is low, the company’s dividend growth has been impressive.
However, equity valuation has risen dramatically over the past year. As a result, we consider the stock to be overvalued and a correction could result in negative shareholder returns over the next five years.
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