Zep, Inc. (ZEP): Why Ecolab Inc. (ECL) Could Do More With Its Dividend

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The Dividend Aristocrats is a list of stocks that have increased their dividends annually for at least 25 years. For dividend investors, it’s a hallmark of quality and consistency. Yet a stock doesn’t actually have to have a high dividend yield in order to qualify. Some members of the Aristocrats actually yield far less than the market average, having chosen to be conservative in their returning capital to shareholders.

Ecolab Inc. (NYSE:ECL)

Water and sanitation company Ecolab Inc. (NYSE:ECL) has raised its dividend every year since 1986, but its share price has risen so rapidly that even with reasonable dividend growth, its payout yield remains a very low 1%. However, with a very low payout ratio, income investors should consider whether Ecolab Inc. (NYSE:ECL) might accelerate its dividend increases in future years. Let’s take a closer look at Ecolab Inc. (NYSE:ECL) to see whether it’s likely to sustain or even improve on its dividend growth.

Dividend Stats on Ecolab

Current Quarterly Dividend Per Share $0.23
Current Yield 1%
Number of Consecutive Years With Dividend Increases 28 years
Payout Ratio 32%
Last Increase December 2012

Source: Yahoo! Finance. Last increase refers to ex-dividend date.

What’s driving Ecolab’s dividend growth?
Ecolab finds itself in an increasingly important industry to support overall global economic growth. The company helps countries around the world manage their water resources as efficiently as possible, making the most use of available supplies, and ensuring water quality with its cleaning and sanitation services. Given that more than a third of the world’s population lives in areas where water is scarce, especially in rapidly growing nations like China and India, Ecolab Inc. (NYSE:ECL)’s opportunity to grow is almost boundless.

In order to take maximum advantage of its opportunity, Ecolab Inc. (NYSE:ECL) has made several smart strategic moves. Late last year, the company decided to sell off its vehicle-care products division to cleaning-products maker Zep, Inc. (NYSE:ZEP), paving the way for a greater focus on its water-management business.

But a much more important deal for Ecolab Inc. (NYSE:ECL) involved buying privately held Champion Technologies for $2.5 billion. This added to its 2011 buyout of Nalco Holding, and made Ecolab a market leader in oilfield chemicals.

Alternative production methods like hydraulic fracturing are extremely water- and chemical-intensive, and high energy prices have spurred huge growth in their use. The much-smaller Nuverra Environmental Solutions Inc (NYSE:NES) has become a big player in the fracking water-services niche, helping drillers obtain and recycle water supplies in areas where getting enough water is a major challenge. Its success has spurred competition from more established oil-services players Halliburton Company (NYSE:HAL) and Baker Hughes Incorporated (NYSE:BHI), which in time could create overcapacity that would threaten the profitability of the segment.

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