Ecolab’s long history of growth and rising dividends is evidence of a strong and durable competitive advantage.
The company’s competitive advantage comes from a mix of its industry leading size, trusted brands, and innovative research and development division.
The company’s 2014 annual report said the following about the company’s value-driving research and development team:
“Ecolab’s commitment to innovation fuels our long-term growth and results in a broad range of solutions that meet our customers’ operational and sustainability challenges. With 19 innovation and technical support facilities, 1,600 Research, Development and Engineering (RD&E) associates throughout the world and more than 6,700 patents, we develop high-performing solutions and technologies that provide value to our customers.”
The company’s larger size allows it to outspend its competitors in research and development which drives further innovation and an even greater research budget.
Ecolab’s Better-Than-Expected Growth
Ecolab’s growth over the last year has been higher than what one would normally expect from a well-established business:
– Revenue-per-share growth of 10.1% a year
– Earnings-per-share growth of 13.3% a year
– Dividends-per-share growth of 14.7% a year
Ecolab Inc. (NYSE:ECL) is experiencing short-term headwinds from the strong United States dollar and declining oil prices. Ecolab’s global operations mean that a strong dollar negatively impacts earnings. Low oil prices hurt the company’s Global Energy segment.
Despite these short-term setbacks, Ecolab is still expected to grow earnings-per-share by 4% to 6% in fiscal 2015.
The company’s long-term growth prospects remain bright. Demand for cleaning and safety industries will remain strong. Continued growth in emerging markets combined with more government regulations are the long-term growth drivers for Ecolab.
I expect Ecolab to continue compounding earnings-per-share at 9.0% to 13.0% a year over the next several years. Growth could be slower if oil prices continue to fall and the dollar continues to strengthen.
Valuation – Is Now The Time to Buy?
Ecolab is a shareholder friendly with favorable growth prospects. As one would expect, it trades at a premium price-to-earnings ratio.
Ecolab currently trades at a price-to-earnings ratio of about 26.4. For comparison, the S&P 500 is trading for at a price-to-earnings ratio of 21.7.
It’s true that Ecolab has an above-average price-to-earnings ratio. The company has traded for a steep premium to the S&P 500 for much of the last decade. Ecolab is shareholder friendly and has excellent long-term growth prospects. As a result, I believe the company to be trading around fair value at this time.
Ecolab’s services are vital to the businesses it serves. As a result, the company grew earnings-per-share each year throughout the Great Recession of 2007 to 2009.
The company’s earnings-per-share through the Great Recession of 2007 to 2009 are shown below to detail its success:
– 2007 earnings-per-share of $1.66
– 2008 earnings-per-share of $1.86
– 2009 earnings-per-share of $1.99
Ecolab Inc. (NYSE:ECL) is a recession resistant stock with a long dividend history and excellent growth prospects. The company’s low dividend yield and above average price-to-earnings ratio prevent it from ranking especially high using The 8 Rules of Dividend Investing.
Despite recent headwinds (strong dollar, low oil prices), Ecolab’s stock price has not gone on sale. Ecolab is a long-term hold for investors looking for a stable dividend growth stock in a slow changing industry. The stock’s low yield makes it a poor choice for investors in need of current income. Now is not the time to initiate a new position in this great business.