Dividend Aristocrats In Focus Part 11: Ecolab Inc. (ECL)

Valuation & Expected Total Returns

Ecolab stock trades for a forward price-to-earnings ratio of 23.3. By comparison, the S&P 500 trades for a forward price-to-earnings ratio of 18.1.

Since 2000, Ecolab has an average price-to-earnings ratio of 26. The company is trading about in line with its historical valuation levels at current prices. Ecolab has historically traded for higher multiples because of its safety and better growth prospects.

Ecolab currently pays an annualized dividend of $1.40 per share, which comes out to a 1.2% dividend yield. This is below the 2% average dividend yield in the S&P 500.

Ecolab makes up for its below-average dividend yield with strong dividend growth each year. Over the past five years, Ecolab has doubled its quarterly dividend—a 15% compound annual dividend growth rate in that time.

There may not be much room for multiple expansion, but Ecolab’s high earnings growth rate should fuel strong returns for shareholders. The dividend yield is a nice added kicker to future returns.

Going forward, investors can still reasonably expect low double-digit total returns on a compound annual basis, before changes in the valuation multiple level.

Final Thoughts

Ecolab Inc. (NYSE:ECL) is a high-quality company with a strong business model and a leadership position in its industry. It rewards shareholders with consistent earnings-per-share growth, which fuels its impressive dividend growth. The company has paid uninterrupted dividends (2) for 79 years in a row.

The disadvantage of owning Ecolab stock is its low current dividend yield; this may make the stock somewhat undesirable for investors who desire current income. But Ecolab is a compelling hold for dividend growth investors looking for above-average total returns over longer time periods.

The company ranks in the top 1/3 of stocks in the Sure Dividend database using The 8 Rules of Dividend Investing.  Ecolab ranks well because of its double-digit earnings-per-share growth rate and lower payout ratio which typically hovers around 30%. Lower payout ratios make dividend cuts less likely – and they give a company room to grow dividends faster than earnings-per-share going forward.

Note: This article is written by Bob Ciura and was originally published at Sure Dividend.

Additional Links:

(1) http://investor.ecolab.com/~/media/Files/E/Ecolab-IR/documents/q2-2016-earnings-press-release.pdf

(2) http://investor.ecolab.com/news-and-events/press-releases/2015/12-03-2015-185505522

(3) http://investor.ecolab.com/dividends.cfm