Updated March 29, 2021 by Bob Ciura
The Dividend Aristocrats prove that boredom isn’t always bad when it comes to investing. The Dividend Aristocrats are a group of 65 companies in the S&P 500 Index that have seen dividend increases for at least 25 consecutive years.
We’re big fans of the Dividend Aristocrats and believe that investors can get superior returns on these quality dividend stocks. That’s why we’ve created a full table of all 65 Dividend Aristocrats – with key financial metrics that matter most to investors – that you can download by clicking the link below:
We review all 65 Dividend Aristocrats annually. The next stock in the series is the industrial manufacturer Pentair plc (PNR).
Pentair doesn’t have an exciting business model. It most likely won’t appear as the next hot growth stock anytime soon. Instead, it’s a slow and steady dividend stock that has created significant shareholder wealth over the past few decades.
Pentair has increased its dividend for an impressive 45 straight years. Most recently, the dividend was increased by 5% in December 2020. The company’s dividend is also very safe. Pentair is a high quality company that offers investors steady dividend growth.
Pentair is based in the UK but has large offices in Europe and the US, as well as other international regions. The company was founded in 1966. In 1968, Pentair acquired Peavey Paper Mills, making it a leader in paper products. Paper fueled the company’s growth over the next decade until management decided to diversify into other product categories.
Pentair’s first investment outside of paper products was the acquisition of Porter-Cable, a manufacturer of portable electronic power tools. In the decades since then, Pentair has further diversified its product line through acquisitions.
The company recently spun off its engineering solutions business and is now a pure water solutions company. The water-only company now has just over $ 3 billion in sales and is focused on improving the availability and quality of water.
The spin-off took place in the second quarter of 2018 and the new business is now called nVent Electric and traded under the ticker NVT. After the spin-off, Pentair is now a pure water solutions company operating in three segments: Aquatic Systems, Filtration Solutions and Flow Technologies.
2020 was another year of growth for Pentair.
Source: Investor Presentation
penTair reported on his fourth-Quarterly and full year results on January 28th ... Quarterly revenue of $ 800 million increased 5% year over year. Core sales (excluding currency, acquisitions and divestitures) increased 3% in the quarter. Earnings per share rose 3% for the quarter.
For the full year, earnings per share rose 5% to $ 2.50. The company expects another year of growth in 2021, with EPS expected in a number of $ 2.60 to $ 2.75. In the middle, the EPS would increase by 7% in 2021.
Between 2008 and 2017 (before the spin-off from nVent), Pentair was able to increase earnings per share by 5.5% annually. Adjusted for the impact of the last financial crisis – an unusually severe recession that caused Pentair earnings per share to decline a little more than 30% between 2008 and 2009 – Pentair’s long-term growth rate of earnings per share would have been even higher.
Pentair management believes a long-term earnings per share growth rate of 10% is possible, but we are a little more conservative. We believe it is better to expect Pentair to grow earnings per share at 6% to 7% in the years to come.
The company should be able to generate this growth through increased sales made possible by organic growth and acquisitions, as well as tailwinds from margin expansion and share buybacks, which will result in a further decline in Pentair’s stock count.
Pentair will benefit from a number of structural tailwinds, such as the aging water infrastructure in the US. Pentair continues to have very strong organic growth on a consolidated basis as Aquatic Systems is performing well. Acquisitions will also fuel the company’s growth.
Competitive advantage and recession performance
One of the competitive factors that have driven Pentair’s impressive growth is its lean cost structure. This is not a coincidence; Pentair has used a strategy called the Pentair Integrated Management System (PIMS) that enables high profit margins.
PIMS enables leaner manufacturing processes and increases efficiency in the entire supply chain and in the company’s sales. Although the efforts are years old at this point, they still permeate the company’s strategy today. Impact is a culture and mindset that is relentlessly focused on reducing the cost of their model.
The PIMS is an organization-wide system. It affects talent management by providing the right incentives to employees and giving individual responsibility to all employees down to the operator level.
Within the PIMS system, the Lean Enterprise system helps increase profit margins. It drives margin expansion by increasing productivity at the production sites and helps identify acquisition targets with the highest cost savings potential.
Due to its competitive advantages and high margins, the company was able to remain profitable during the great 2007-2009 recession:
- 2007 earnings per share of $ 2.08
- 2008 earnings per share of $ 2.20, up 5.8%
- 2009 earnings per share of $ 1.47, down 33%
- 2010 earnings per share of $ 2.00 (up 36%)
As a global industrial manufacturer, Pentair is not immune to recessions. It quickly bounced back, however. Pentair’s earnings per share reached a new high in 2011. Now that Pentair is a pure water treatment company, we expect the next recession to have a milder impact on the company’s bottom line.
Pentair is now focusing on services that can be viewed as needs rather than needs. We believe the company’s resistance to recession has improved in recent years.
Valuation and expected return
Based on expected earnings per share of $ 2.68 for 2021, Pentair has a price / earnings ratio of 23.2. Our fair value is a PER of 18, which is close to the 10-year average.
Given that, we view the stock as slightly overvalued, and a reduction in the price / earnings ratio could negatively impact shareholder return by 4.9% per annum through 2026. This is also offset by EPS growth (estimated at 6.5% per year) as a 1.3% dividend yield.
Overall, we see an annual return of 2.9% for Pentair shareholders, consisting of a dividend yield of 1.7%, earnings per share growth of 6.5% and a negative return of -1.6% due to a declining valuation multiplier.
An expected return near 3% is a pretty poor return. This is enough for investors to keep holding the stock given the forecast earnings growth and very strong dividend hike in the past, although the low dividend yield and high valuation are unattractive to new buyers.
Pentair has a strong business model and competitive advantages. These traits have fueled steady dividend growth over the past four decades, and we see no reason to believe that this won’t last for many years.
While Pentair isn’t seen as hugely cheap today, it has a decent dividend yield and promising future prospects. The company should be able to keep increasing its dividend every year. As a result, we currently rate Pentair stock as a hold, but would upgrade our rating to a buy if the stock retreats at fair value.
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