Updated April 20, 2021 by Bob Ciura
Roper Technologies has increased its dividend payout for 28 consecutive years, making it one of the Dividend Aristocrats.
The Dividend Aristocrats are a select group of 65 stocks in the S&P 500 with more than 25 years of consecutive dividend increases. We believe the Dividend Aristocrats are some of the best long-term investments to be found on the stock market.
You can download a full list of all Dividend Aristocrats (along with key key financial metrics) by clicking the link below:
To become a dividend aristocrat, a company needs a strong business model, lasting competitive advantage, and the ability to withstand global recessions. The Dividend Aristocrats are clearly high quality dividend growth stocks. Being a member of the group is no mean feat for Roper.
Even more attractive is Roper’s high dividend growth rate. The dividend has almost quintupled since 2009. The last increase was a 10% increase in November 2020.
Even among the Dividend Aristocrats, dividend increases of 10% + are rare, which makes Roper’s dividend increases very impressive over the past decade. This article discusses Roper’s business, growth potential, and valuation.
Roper designs and develops software, including software-as-a-service and licensed technology, and technical products and solutions. Roper has a diverse portfolio of products and services that it offers to a wide variety of sectors including healthcare, transportation, food, energy, water and education.
Roper focuses on four main business areas:
- Application software
- Network software and systems
- Measurement and analysis solutions
- Process technologies
The application software business includes Aderant, CBORD, CliniSys, Data Innocations, Deltek, Horizon, IntelliTrans, PowerPlan, Strata and Sunquest as main products.
The network software and systems business includes ConstructConnect, DAT, Foundry, Inovonics, iPipeline, iTradeNetwork, Link Logistics, MHA, RF-Ideen, SHP, SoftWriters and TransCore as main products.
Measurement and analysis solutions include Alpha, CIVCO Medical Solutions, CIVCO Radiation Therapy, Dynisco, FMI, Gatan, Hansen, Hardy, IPA, Logitech, Neptun, Northern Digital, Struers, Techhnolog, Uson and Verathon.
Finally, the Process Technologies segment includes AMOT, CCC, Cornell, FTI, Metrix, PAC, Roper Pump, Viatran and Zetec.
The company has had an impressive record of growth over the past five years.
Source: Investor Presentation
Roper has benefited largely from the steady expansion of the U.S. economy over the past decade. We believe that the company can maintain a positive growth path over many years.
Roper is in a unique position to continue generating strong growth in its business over the past year, which has been a major challenge for the US economy. Roper reported its fourth quarter and full year results on January 29, 2021 for the period ended December 31, 2020. Quarterly revenue and adjusted earnings per share were $ 1.51 billion and $ 3.56, respectively, up 8% and 5% year over year. respectively.
Roper continues to expand its portfolio and took advantage of the current extremely low interest rate environment to raise massive $ 6 billion in capital for high value software acquisitions during the year. The $ 5.35 billion purchase of Vertafone underscores the company’s financial resilience as it was funded entirely by cash, credit facility and debt.
Acquisitions are a key component of Roper’s growth strategy as the company has spent well over $ 10 billion on acquisitions over the past decade.
Normally, such a high level of acquisitions would be a red flag, as many companies are paying too high a price for companies that are underperforming. In this case, however, Roper’s acquisitions have brought significant added value for the company.
Along with the financial results, management updated its guidance for fiscal year 2121 to expect full year earnings per share of $ 14.35 to $ 14.75 and adjusted earnings per share for the first quarter of $ 3.26 to $ 3, $ 32.
Competitive advantage and recession performance
In recent years, Roper has pursued an asset-light business model with a special focus on software and technical products and services. The company followed this strategy to increase margins by lowering investment needs while generating recurring income. This resulted in much more cash conversion over time.
Source: Investor Presentation
This gives Roper enormous competitive advantages. The high margins and operational efficiency provide him with plenty of cash flow that can be invested to stay one step ahead of the competition.
Another competitive advantage of Roper is that it is highly diversified within the technology sector. It owns 45 independent companies with leadership positions in niche markets. In addition, these end markets are very diversified and offer strong recurring revenue and customer loyalty.
Investors should also note that Roper is a cyclical business. It has the ability to grow very strongly when the economy expands, but it also struggles during recessions. Earnings per share during the Great Recession are shown below:
- 2007 earnings per share of $ 2.68
- 2008 earnings per share of $ 3.06, up 15%
- 2009 earnings per share of $ 2.58, down 16%
- 2010 earnings per share of $ 3.34, up 29%
As you can see, Roper is not a very recession-resistant company. Earnings per share fell by 16% in 2009. Should the economy plunge into recession in the coming years, Roper could see earnings decline.
While Roper’s profits were volatile, they still grew from 2007 to 2010 overall. As the US recovered from the great recession, profits continued to rise. We expect Roper to grow earnings per share by 10% annually through 2026.
Valuation and expected return
Roper is a high quality company with strong growth prospects thanks to the high demand for its technology. Therefore, it should come as no surprise that the stock has a premium rating as the stocks currently trade at a price-to-earnings ratio of 29.2. The P / E multiple is above the average valuation of the last 10 years.
Since the company is very vulnerable to economic fluctuations, we have a target price of 26 out of 26. If stocks were to fall back on this target rating within five years, the annual return would decrease by 2.3% year over year this time around. Potential overvaluation is a risk that investors should consider before buying the stock.
However, this is offset by the growth in earnings per share (expected to be 10% per year) plus the dividend yield of 0.5%, resulting in an expected total return of 8.2% per year. This is a satisfactory forecast return for a strong company.
Roper has a high quality business model and an annual earnings per share growth of 10% is not an unreasonable assumption for the future. The stock is also a dividend aristocrat, and the company’s high rate of earnings growth also allows for 10% + annual dividend increases.
Roper makes a great company, and while the stock appears overvalued, it could nonetheless generate solid returns for shareholders. Roper remains a high quality dividend growth stock.
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