PNR’s balance sheet is the biggest factor weighing on the company’s Dividend Safety Score. As seen below, PNR has just $126 million of cash on hand compared to $4.7 billion in debt. Its dividend payments last year also exceed the company’s current cash balance, putting pressure on the company to generate enough cash flow to keep funding its dividend and operations. If it weren’t for PNR’s consistent free cash flow generation and large aftermarket business, this would be a bigger issue.
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.
PNR plans to raise its dividend by 5% in 2016, marking its 40th consecutive dividend increase. The company is a dividend aristocrat and will also join the dividend kings list in 10 years. PNR’s Dividend Growth Score is 68, which indicates that the company has above-average long-term dividend growth potential.
While macro headwinds will restrict near-term earnings and dividend growth, we can see that PNR’s dividend growth rate otherwise accelerated over the last decade. Assuming macro conditions eventually normalize and PNR returns to a 9-11% earnings growth rate, we expect the company’s dividend to resume growth at a high-single digit rate.
Source: Simply Safe Dividends
Valuation
Pentair plc. Ordinary Share (NYSE:PNR) trades at 11x forward earnings and has a dividend yield of 3.1%, which is significantly higher than its five year average yield of 1.9%.
Management also believes PNR can deliver 2-4% organic sales growth and 9-11% annual earnings per share growth over the long term, which would imply 12-14% annual total return potential even if PNR’s earnings multiple remains depressed. The market must think that PNR’s business trends are going to get worse before they get better.
We think the stock is starting to look attractively priced for investors with a time horizon of at least five years. However, we think the company’s balance sheet and high exposure to energy markets are two factors that could inflict even more damage to the stock over the next 6-12 months. We would prefer to stick with some other blue chip dividend stocks that are also going on sale in today’s market.
Conclusion
With major energy companies calling for even deeper spending cuts by the day, it’s hard to get too excited about PNR at the moment. There is very little the company can do to combat the slump in commodity prices and the slow growth rate of economies around the world.
While we believe these headwinds will ultimately prove to be transitory, they could persist longer than investors expect. The company’s levered balance sheet adds further risk to an investment in PNR today. We will remain on the sidelines for now.
Disclosure: None
