Dividend Aristocrats in Focus Part 37: Cintas - Sure Dividend Sure Dividend

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Dividend Aristocrats in Focus Part 37: Cintas


Published November 10th, 2016 by Bob Ciura

Cintas Corporation (CTAS) first started out all the way back in 1929. Back then, it was known as Acme Industrial Laundry Company. It was founded by Richard (Doc) Farmer, who collected rags that were soaked with chemicals from factories. He then cleaned the rags for a fee.

Richard (Doc) Farmer’s grandson, Richard T. Farmer, joined the company in 1956 after graduating from college. He decided to leave the family industrial laundry business to start Cintas in 1968. He currently serves as the Chairman Emeritus of the Board of Directors. Cintas went public in 1983.

Today, Cintas generates nearly $5 billion in annual sales and has 35,000 employees.

Cintas has increased its shareholder dividend for 33 consecutive years.  This makes the company one of only 50 S&P 500 stocks (called Dividend Aristocrats) with 25+ years of consecutive dividend increases.  You can see the full Dividend Aristocrats list here.

Keep reading this article to learn more about the investment prospects of Cintas.

Business Overview

Cintas designs and manufactures corporate uniforms, entrance mats, restroom supplies, fire protection, and first aid products. It has a very large and diversified customer base; Cintas services more than 900,000 businesses in North America, Latin America, Europe, and Asia.

The company is split up into three main businesses:

The Uniform Rental and Facility Services segment provides products and services to customers through the company’s local delivery routes. The First Aid and Safety Services and All Other segments are responsible for providing products through its distribution network and local delivery routes.

All three business segments have been growing at a rapid clip over the past five fiscal years.

ctas-five-year-growth

Source: 2015 10-K, page 14

Going forward, these businesses are likely to continue growing each year.

Growth Prospects

For the most part, Cintas’ growth prospects are quite strong. The company continues to benefit from the gradual recovery in the global economy.

It is likely that future earnings growth will accelerate. First, there should be lower levels of global economic uncertainty in 2017 and beyond. The Brexit vote this year and the U.S. elections have raised uncertainty, which has caused many companies to delay capital spending.

In addition, the decline in commodity prices has weighed on Cintas. The oil and gas industry makes up a significant amount of Cintas’ customers. These companies have cut headcount as oil and gas prices have collapsed.

This has weighed on Cintas. Management estimated in the first quarter that weakness in the oil and gas industry lowered its revenue growth rate by about 110 basis points.

Lastly, Cintas should realize growth from its portfolio restructuring. Over the past year, the company has divested out of low-growth businesses deemed non-critical to the future strategy. And, it has conducted acquisitions of companies it believes have a long runway of growth up ahead.

For example, in 2016 Cintas sold its interest in Shred-it International, for $578 million. It also acquired G&K Services for a total enterprise value of $2.2 billion. G&K Services will add approximately $1 billion of annual revenue to Cintas and will give the company a stronger grip on the branded uniform and facility services industry.

Competitive Advantages & Recession Performance

Cintas has a distinct operating advantage, which is its distribution network. Cintas has approximately 9,000 local delivery routes, 377 operational facilities and eight distribution centers.

This helps keep competition at bay. It would take an enormous amount of start-up capital to even approach Cintas’ operational size.

Its massive distribution infrastructure provides the company with economies of scale, and high margins. For example, last year Cintas generated a 43.4% gross margin.

The company’s ability to prevent smaller competitors entering the industry and taking market share is what Warren Buffett would call a wide economic moat.

Cintas’ earnings-per-share growth mimics economic growth. During the Great Recession of 2007-2009, many businesses reduced headcount. Hiring remained weak, even well after the recession ended. As a result, Cintas had a difficult time growing earnings-per-share, despite the fact that the recession officially ended in 2010.

The company’s earnings-per-share for 2008-2012 are shown below:

As you can see, Cintas’ earnings-per-share did not see a new post-recession high until 2012.

Valuation & Expected Total Return

Cintas stock is cheaply valued. The stock trades for a price-to-earnings ratio of 23.8. This is on par with the average price-to-earnings ratio of the S&P 500, which is also around 24. Cintas is valued above its own historical average over the past 16 years. Since 2000, Cintas has traded for an average price-to-earnings ratio of 18.

As a result, Cintas stock appears fairly valued relative to the market or somewhat overvalued relative to its historical price. However, since it is such a high-quality company, it deserves at least a market multiple.

Going forward, Cintas shareholders should expect strong returns, based on earnings growth and dividends:

Based on these assumptions, Cintas stock could return 11%-13% per year moving forward, excluding any expansion or contraction of the price-to-earnings multiple.

Final Thoughts

Cintas is a highly profitable company with a leadership position in its industry and compelling growth prospects.

One negative aspect of Cintas stock is its low current dividend yield. Cintas’s 1% dividend yield is about half the average dividend yield in the S&P 500. And, Cintas pays its dividend only once per year, whereas the norm for most companies is to issue dividends on a quarterly basis. Quarterly dividends help investors compound their wealth faster than annual payouts.

That being said, Cintas makes up for this with very high dividend growth rates. For example, its 2016 dividend raise was a very healthy 27%.

As a result, Cintas stock may not be attractive for investors who want income now, such as retirees. But the company does have better than average growth prospects and a long history of dividend increases – which should appeal to dividend growth investors.


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