Sure Dividend

High-Quality Dividend Stocks, Long-Term Plan
The Sure Dividend Investing MethodMember's Area

Dividend Aristocrats In Focus: A.O. Smith Corporation

 Updated on January 31st, 2023 by Samuel Smith

Every year, we individually review all the Dividend Aristocrats. This is because we view them as particularly appealing stocks for long-term dividend growth investors.

The Dividend Aristocrats are a select group of stocks in the S&P 500, with 25+ years of consecutive dividend increases. You can see a full downloadable spreadsheet of all 68 Dividend Aristocrats, along with several important financial metrics such as price-to-earnings ratios, by clicking on the link below:


The next Dividend Aristocrat in our 2023 series is A.O. Smith (AOS). In 2022, A.O. Smith increased its dividend for the 29th consecutive year. Over the past five years, it has increased its dividend at a compound annual growth rate of 16.5%.

With a current dividend yield of 2.0%, A.O. Smith might not appeal to investors looking for high levels of income right now, such as retirees. Those looking for rapid dividend growth, on the other hand, might find the company more attractive due to its long history of regular double-digit dividend increases.

Business Overview

A.O. Smith is a global leader applying energy-efficient products and solutions. It manufactures a variety of residential and commercial water heating equipment, as well as water treatment and air purification products.

The company is perhaps best-known for its water heaters. It operates in two operating segments, separated by geography:

Source: Investor Presentation

As you can see, the company has a sizable international presence.

A.O. Smith has performed very well over the past decade, thanks largely to the steady global economic recovery coming out of the Great Recession of 2007-2009. From 2011 through 2021, sales and adjusted earnings-per-share increased 7% and 21.1% per year, respectively. In 2022, A.O. Smith continued to grow at a solid clip, albeit at a bit slower pace with 6% year-over-year sales and 6% year-over-year adjusted earnings-per-share growth.

Combined with margin expansion and share repurchases, A.O. Smith’s impressive sales growth has fueled impressive earnings growth as well. Last year was a decent year for A.O. Smith even with all of the inflationary issues that every company is facing.

Growth Prospects

A.O. Smith’s growth catalysts in the U.S. include continued economic growth and increasing housing prices. As a manufacturer of water heating, water treatment, and air purification products, the company is reliant on a financially healthy consumer and housing market.

When home prices are rising and unemployment is low, consumers with disposable income are much more willing to invest in upgrades like new water heaters.

Outside the U.S., the company’s main growth prospects are in China and India, two key emerging markets with large populations and high economic growth.

Source: Investor Presentation

For 2023, A.O. Smith expects sales to be flattish year-over-year, though it still expects emerging markets such as China and India to represent major long-term growth opportunities for the company.

We expect A.O. Smith to grow earnings-per-share at a rate of 6% per year through 2027. We believe the company should be able to achieve at least this level of growth due to organic revenue growth and share repurchases with potential additional acquisitions adding further growth.

Competitive Advantages & Recession Performance

A.O. Smith’s strong growth is due to its competitive advantages, primarily its top market share. A.O. Smith has the #1 market share in U.S. water heaters. It holds over 30% domestic residential share and over 40% of the commercial market share.

Possessing the top industry position gives A.O. Smith pricing power and high margins. In turn, this provides the company the ability to generate lots of cash flow, which enables it to invest in new product innovation.

One potential risk for A.O. Smith is a recession. As a manufacturer, the company is closely tied to the health of the overall economy. It is not a highly recession-resistant business model.

Earnings-per-share during the Great Recession are below:

As you can see, the company performed very well during 2008 and 2009, the worst years of the recession. Earnings took a significant hit in 2010 but quickly recovered in 2011. Overall, the company performed exceptionally well, since it was still able to grow earnings over the course of the recession.

Valuation & Expected Returns

Based on the current share price of ~$68 and the midpoint of 2023 EPS guidance of $3.30, A.O. Smith shares currently trade for a price-to-earnings ratio of 20.5. We believe a price-to-earnings multiple target of 19 seems appropriate.

As a result, A.O. Smith seems overvalued right now. If the P/E multiple were to decline to the fair value estimate of 19, it would reduce annual returns by 1.5% over the next five years.

Shareholder returns will also be boosted by earnings growth and dividends, which together add up to 8% annualized returns. In summary, total returns are expected to be 6.5% per year, since valuation multiple compression is expected to slightly offset the expected earnings-per-share growth and the dividend.

Final Thoughts

A.O. Smith is an industry-leading company. It has the top brand in its category, with compelling future growth potential. It has such a dominant market share of its industry that the company can continue to overcome short-term difficulties. Over the long term, we believe the potential growth opportunities in emerging markets are highly attractive.

While the dividend yield is on the low side, the company’s dividend growth pace and track record is impressive.

However, the stock valuation remains slightly elevated. As a result, we view the stock as relatively unattractive to purchase. Thus, we rate the stock a hold for now.

Additionally, the following Sure Dividend databases contain the most reliable dividend growers in our investment universe:

If you’re looking for stocks with unique dividend characteristics, consider the following Sure Dividend databases:

The major domestic stock market indices are another solid resource for finding investment ideas. Sure Dividend compiles the following stock market databases and updates them monthly:

Thanks for reading this article. Please send any feedback, corrections, or questions to

More from sure dividend
The Sure Dividend Investing MethodMember's Area