Dividend Aristocrats Part 37: Cintas Corporation (CTAS)

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Dividend Analysis

Cintas currently has a dividend yield of just 1.2%. The company has a low payout ratio of around 37%.

Cintas’ dividend payments are in no danger of being cut due to the company’s low payout ratio and consistent growth.

The company’s low yield and payout ratio are somewhat misleading, as management rewards shareholders with strong share repurchases rather than dividends.

Going forward, Cintas will likely raise its dividend payments slightly faster than overall company growth due to its fairly low payout ratio.

I expect dividend per share growth of around 10% a year over the next several years due to growth and modest payout ratio expansion. The company has grown its dividend payments at around 10% a year over the last decade, and recently hiked its dividend by 23.5%.

Despite solid dividend growth, the company’s low yield makes it unappealing for investors seeking current income. Additionally, the company only pays dividends once per year, meaning investors seeking more regular dividend income should look elsewhere.

Recession Performance

Cintas remained profitable through the Great Recession of 2007 to 2009.

As mentioned earlier in this article, the company’s growth tracks overall economic activity. As a result, Cintas saw downturns in its earnings-per-share in 2009 at the peak of the Great Recession.

The company’s earnings-per-share for 2007 through 2012 are shown below to give you an idea of how long it took the company to recover to new earnings-per-share highs after the Great Recession:

– 2007 earnings-per-share of $2.09 (new high)

– 2008 earnings-per-share of $2.15 (new high)

– 2009 earnings-per-share of $1.83 (recession decline)

– 2010 earnings-per-share of $1.49 (recession low)

– 2011 earnings-per-share of $1.68 (partial recovery)

– 2012 earnings-per-share of $2.27 (full recover, new high)

Cintas’ recovery was delayed as businesses were hesitant to hire new employees until well after the Great Recession ended.

Share repurchases helped boost earnings-per-share. On a net income basis (not including share repurchases), Cintas did not hit new highs from 2009 earnings lows until 2013. The company does grow over the long run, but it is susceptible to economic downturns which delay growth.

Cintas’ Valuation

Cintas has historically traded for a price-to-earnings multiple in-line with the S&P 500.

– S&P 500 currently has a price-to-earnings ratio of 21.3

– Cintas currently has a price-to-earnings ratio of 25.9

Cintas is currently trading at a 1.2x premium to the S&P 500. The company’s long term expected total return is around what one would expect from the S&P 500 (if not a bit below it).

If the S&P 500 were to fall to its historical average price-to-earnings ratio of 15.6, Cintas would look very overvalued at current prices. Even in today’s ‘premium value’ market (due to low interest rates), Cintas appears to be overvalued.

Final Thoughts

Cintas Corporation (NASDAQ:CTAS) has a durable competitive advantage and operates in a slow changing industry that will likely continue far into the future. It’s difficult to fathom the need for laundering services to somehow go away.

It is hard to imagine a world where employees no longer need to wear uniforms; as a result, Cintas will likely continue to grow for many years to come.

The company’s low yield make it a poor choice for investors seeking current income. Additionally, Cintas is likely overvalued at current prices. The company ranks in the bottom 50% of stocks with 25+ years of dividend payments without a reduction using The 8 Rules of Dividend Investing.

Potential investors in this stable business should wait until the company’s price-to-earnings ratio falls in line (or below) the S&P 500’s price-to-earnings ratio before initiating a position in Cintas.

Disclosure: None

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