Cintas Corporation (NASDAQ:CTAS) has also done an excellent job generating and growing free cash flow over the last decade. The best business models generate real cash each year that can be used for growth (acquisitions in the case of CTAS) and rewarding shareholders with higher dividends.
Source: Simply Safe Dividends
CTAS has created value for shareholders by earning a healthy return on invested capital over the last decade. Earning a double-digit return is very good for such a simple business and highlights the company’s competitive advantages.
Source: Simply Safe Dividends
We can also see that CTAS’s balance sheet is in good shape. The company has about $670 million in cash compared to $1.3 billion in debt. Its free cash flow easily covers its dividend payments and interest expense, and Moody’s assigned the company an “A2” credit rating last year. CTAS has plenty of firepower to continue acquiring smaller rivals without jeopardizing the dividend.
Source: Simply Safe Dividends
Dividend Growth Score
Our Growth Score answers the question, “How fast is the dividend likely to grow?” It considers many of the same fundamental factors as the Safety Score but places more weight on growth-centric metrics like sales and earnings growth and payout ratios. Scores of 50 are average, 75 or higher is very good, and 25 or lower is considered weak.
CTAS has some of the best dividend growth potential of any stock with a Dividend Growth Score of 99. The company is a dividend aristocrat and raised its dividend by 24% in 2015, marking its 32nd consecutive annual dividend increase.
CTAS has grown its dividend by 15% and 13% per year over the last 5- and 10-year periods, respectively. With a long runway for steady earnings growth and relatively low payout ratios, we expect dividend growth to continue at a healthy double-digit rate for the foreseeable future.
Valuation
CTAS trades at about 21x forward earnings and has a dividend yield of 1.2%, which is slightly lower than its five year average dividend yield of 1.3%.
The company’s dividend yield is low because it doesn’t pay out much of its earnings. Instead, it is reinvesting back into the business for long-term growth. This is the appropriate strategy given CTAS’s good returns on invested capital and has resulted in double-digit earnings growth historically.
Given the size of the company’s markets, the slow-changing nature of the industry, and CTAS’s advantages as the largest player, we think the company will continue generating at least a high-single digit earnings growth over the next five years.
If this plays out, the company appears to offer 8-10% total return potential. However, we would like to buy the stock at an earnings multiple below 20.
Conclusion
CTAS is a boring yet remarkable business. Few companies have survived for so long doing basically the same thing (especially something so simple as providing uniforms and doing laundry). We think this blue chip dividend stock has a bright future ahead of it and will watch closely for an attractive entry price.
Disclosure: None
