Updated April 13, 2021 by Bob Ciura
Increasing dividend income over time is a goal for most dividend growth investors. We believe the best way to do this is to focus on quality dividend growth stocks.
For the best dividend growth stocks in the industry, consider investing in the Dividend Aristocrats, a select group of 65 companies in the S&P 500 index with more than 25 consecutive years of dividend increases.
For a full downloadable table of all 65 Dividend Aristocrats, plus some key financial metrics such as dividend yields and price / earnings ratios, click the link below:
We review all 65 Dividend Aristocrats each year, and the next stock in the 2021 edition is Cintas Corporation (CTAS). Cintas is a high growth dividend stock. It has increased its dividend for 37 straight years, including a 6.8% increase for 2021.
Cintas increases its dividend every year but has a low current yield of just 0.9%. That’s less than half the average dividend yield of the broader S&P 500 index.
In addition, the Cintas share has an extremely high valuation. Hence, potential investors should wait for a better price before buying Cintas stock.
Cintas Corporation was founded in 1929 under the name Acme Industrial Laundry Company. It was founded by Richard “Doc” Farmer, who began collecting chemical-soaked rags from factories and cleaning them for a fee.
Doc Farmer’s grandson, Richard T. Farmer, joined the company in 1956 after graduating from college. After gaining enough experience, he left the family business to start Cintas in 1968.
Today it is the largest company in its industry and has annual sales of over $ 7 billion.
Source: Investor Fact Sheet
The company designs and manufactures company uniforms, entrance mats, toiletries, fire protection and first aid products. The company has a large and diversified customer base that includes more than 1 million companies in North America, Latin America, Europe and Asia.
Cintas is certainly a growth company, and has been for a long time. Because of its competitive advantages, it should continue to grow in the years to come.
Cintas has grown a lot over the past few years. Growth rates were particularly high in the years after the Great Recession, when hiring increased and the labor market recovered. It recovered quickly from the coronavirus pandemic last year, despite the fact that the unemployment rate had risen over an extended period.
The company continues to do well. Cintas reported a profit for the third quarter on March 17thth, 2021 with results that are better than expected top and bottom lines. Third quarter revenue was $ 1.78 billion, compared to $ 1.81 billion a year earlier– –before period. Diluted Merits– –Per– –The stock was $ 2.37 for the third quarter, up 9.7% over the same period last year.
Organic sales remained unchanged in the third quarter, excluding acquisitions, divestitures, differences in the number of working days, and foreign exchange Translation. The organic sales growth rate for the Uniform Rental and Facility Services business segment was flat, The first aid and security services segment grew by 17.7%. As a percentage of Revenue, gross margin improved 10 basis points to 45.6%. We’ve raised our estimate to $ 10 this year– –Per– –divide by strong Q3 results.
Cintas has positive growth prospects for the future. Catalysts for future growth include the very strong labor market in the US and the willingness and ability of Cintas to acquire growth, as was the case with G&K Services in 2017.
Cintas benefits from global economic growth. As businesses grow and hire new employees, the demand for service uniforms and related equipment increases. This is how Cintas has been able to achieve such high growth rates over time.
Another growth catalyst for Cintas is the restructuring of the portfolio. The company has sold sub-par segments and acquired companies in new areas as management is ready to shift its portfolio to the best future opportunities.
Overall, we see average annual growth in earnings per share of 6% for Cintas over the next five years.
Competitive advantage and recession performance
Cintas has a distinct operational advantage, namely the large distribution network. For example, Cintas has more than 11,000 local delivery routes.
It’s the largest company in its industry that gives it market control. It would be very difficult for a new competitor to enter the market and try to disrupt Cintas’ business model, especially after buying G&K. This helps keep competition at bay as Cintas has a deeply entrenched customer base . Cinta’s sales skills and reputation for quality ensure high margins.
While Cintas is a fast-growing company, it also relies on a healthy global economy. When the economy plunges into recession, companies hire fewer people and often reduce their workforce. This leads to a lower demand for the products manufactured by Cintas. Cintas struggled to grow earnings per share during the Great Recession, even though the recession officially ended in 2010.
The company’s earnings per share for 2008-2010 are shown below:
- 2007 earnings per share of $ 2.09
- 2008 earnings per share of $ 2.15 (up 2.9%)
- 2009 earnings per share of $ 1.83, down 15%
- 2010 earnings per share of $ 1.49 (down 19%)
As you can see, Cintas struggled with double-digit earnings declines for two consecutive years in 2009 and 2010. This shows how closely the company’s profits are tied to the state of the economy. At the same time, Cintas remained profitable, which allowed it to keep increasing dividends every year. The company’s dividend also seems reasonably safe at current levels.
And Cintas quickly emerged from the recession. The company increased earnings per share in 2011 and 2012 by 13% and 35%, respectively. While the risk of a short-term recession is small, shareholders should be aware that the economic downturn is severely affecting Cintas’ profitability.
Valuation and expected return
Based on expected earnings per share of $ 10 for fiscal 2021, Cintas stock trades at a price-to-earnings-ratio of 35.3. This is a very high rating against the broader market as well as Cintas’ own historical ratings. Our fair value estimate is a P / E of 25 for Cintas shares.
If the stock returned to our estimated price-earnings ratio at fair value over the next five years, shares would fall approximately 6.7% annually due to the multiple valuation. As a result, Cintas is significantly overrated. The growth in earnings per share (expected 6% per year) and the dividend yield of 0.9% offset the negative returns of a falling valuation multiple. Overall, however, the total return over the next five years is estimated to be just 0.2% per year.
In other words, today’s valuation of Cintas has almost factored in five years of growth and dividends, and we believe investors should avoid the stock for that reason.
Cintas is a very strong company with a high rate of growth in income and dividends. Due to the recent impressive price rally, Cintas now has a very high valuation.
Another consequence of the huge price increase in recent years is that the stock has a low dividend yield of less than 1%.
While the company has a safe dividend payout with room for future dividend hikes, the stock is simply overvalued. We rate it as a sale despite its superior fundamentals simply because the valuation is so high.
If Cintas reverts to a normalized valuation at or below our fair value estimate, it could get another Buy recommendation given its strong growth and high quality business.
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