Cintas’s Key Risks
We believe Cintas Corporation (NASDAQ:CTAS) has a lower fundamental risk profile than many other companies. However, its results can be impacted by employment trends, fuel and energy costs, and the health of its end markets (e.g. low oil prices is hurting demand from its oil & gas customers as they reduce their headcount).
However, we don’t believe any of these factors impair CTAS’s long-term outlook. If anything, they could be buying opportunities for patient dividend growth investors.
The longer term issues that could hurt the company’s earnings growth are continued outsourcing of U.S. manufacturing jobs and a potential change in the way businesses choose to dress their employees.
The strong U.S. dollar and higher labor costs have made domestic manufacturers less competitive than overseas competitors, resulting in numerous factory closures and companies choosing to offshore or outsource their operations. Should these trends continue, it could hurt CTAS’s business with goods-producing customers (roughly 30% of its sales).
Not unlike consumers, businesses could also begin to develop a change in taste for their work environments and try to increase employee morale by moving away from uniforms altogether.
However, CTAS’s strong diversification, low market share, and continued opportunities for acquisitions largely mitigate these concerns.
Dividend Analysis: Cintas
We analyze 25+ years of dividend data and 10+ years of fundamental data to understand the safety and growth prospects of a dividend. CTAS’s long-term dividend and fundamental data charts can all be seen by clicking here.
Dividend Safety Score
Our Safety Score answers the question, “Is the current dividend payment safe?” We look at factors such as current and historical EPS and FCF payout ratios, debt levels, free cash flow generation, industry cyclicality, ROIC trends, and more. Scores of 50 are average, 75 or higher is very good, and 25 or lower is considered weak.
CTAS’s dividend is extremely safe with a Safety Score of 98. It scores highly because of its low payout ratios, recession-resistant business, consistent free cash flow generation, and healthy balance sheet.
CTAS’s earnings and free cash flow payout ratios over the last 12 months are 19% and 37%, respectively. As seen below, CTAS’s earnings payout ratio has remained between 20% and 30% most years, which provides plenty of safety and room for continued dividend growth.
Source: Simply Safe Dividends
Source: Simply Safe Dividends
During the last recession, CTAS’s sales fell by 4% in fiscal year 2009 and 6% in fiscal year 2010. However, the company’s free cash flow per share actually grew in each of those years, highlighting the defensiveness of CTAS’s business model. While many businesses lay off some employees during economic downturns, their remaining employees still need their uniforms laundered.
Source: Simply Safe Dividends
