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Dividend Aristocrats In Focus: Cintas Corporation


Updated on January 31st, 2023 by Nikolaos Sismanis

Rising dividend income over time is the main goal for most dividend growth investors. We believe the best way to do this is to focus on high-quality dividend growth stocks.

For the best-in-class dividend growth stocks, consider investing in the Dividend Aristocrats, a select group of 68 companies in the S&P 500 Index with 25+ consecutive years of dividend increases.

You can see a full downloadable spreadsheet of all 68 Dividend Aristocrats, along with several important financial metrics such as dividend yields and price-to-earnings ratios, by clicking on the link below:

 

We review all 68 Dividend Aristocrats each year, and the next stock in the 2023 edition is Cintas Corporation (CTAS). Cintas is a high-growth dividend stock. It has raised its dividend 40 years in a row, including a 21.1% increase in 2022.

Cintas raises its dividend each year, but it has a low current yield of just 1.1%. This is notably below the dividend yield of the broader S&P 500 Index.

In addition, Cintas stock has an extremely high valuation with a price-to-earnings (P/E) ratio of 34.2X. As a result, prospective investors should wait for a better price before buying Cintas stock.

Business Overview

Cintas Corporation started in 1929 under the name Acme Industrial Laundry Company. It was founded by Richard “Doc” Farmer, who started collecting chemical-soaked rags from factories and cleaning them for a fee.

Doc Farmer’s grandson, Richard T. Farmer, joined the company in 1956 after graduating from college. After gaining enough experience, he left the family business to start Cintas in 1968.

Today, it is the largest company in its industry, generating annual revenue in excess of $7.8 billion.

Source: Investor Fact Sheet

Cintas designs and manufactures corporate uniforms, entrance mats, restroom supplies, fire protection, and first aid products. The company has a large and diversified customer base, which includes more than 1 million businesses in North America, Latin America, Europe, and Asia.

Cintas is certainly a growth company and has been for a long time. Due to its competitive advantages, it should continue to grow in the years ahead.

Growth Prospects

Cintas has enjoyed strong growth for the past several years. It saw particularly high growth rates in the years following the Great Recession, when hiring picked up and the labor market recovered. It again quickly recovered from the coronavirus pandemic last year, even though the unemployment rate spiked for an extended period.

The company continues to perform well. Cintas reported second-quarter earnings on December 21st, 2022, and results were better than expected on both the top and bottom lines. Earnings-per-share came to $3.12, which was nine cents ahead of expectations. Revenue was up 13% year-over-year to $2.17 billion and was $40 million ahead of estimates. Organic revenue growth was 12.8% in Q2, which excludes forex and acquisitions/divestitures.

Gross margin was $1.022 billion, up from $885 million a year ago. As a percentage of revenue, Cintas’ gross margin was 47%, up from 46% a year ago. Operating income was $444.9 million, up nearly 17% from last year’s Q2.

Energy expenses were up only slightly year-over-year, helping remove a headwind that was present for most of the past year. As a percentage of revenue, operating income was 20.5% in Q2, up from 19.8% a year ago.

The company now expects revenue between $8.67 billion and $8.75 billion and for earnings-per-share to be between $12.50 and $12.80 for fiscal 2023. We, therefore, expect it to post earnings-per-share of $12.75 following a solid second-quarter report.

Cintas has a positive growth outlook moving forward. Catalysts for future growth include the US job market and Cintas’s willingness and ability to purchase growth, as it did with Gorman Uniform in 2022.

Cintas benefits from global economic growth. As companies grow and hire new employees, service uniforms and related equipment demand rises. This is how Cintas has produced such high growth rates over time.

Source: Investor Fact Sheet

Another growth catalyst for Cintas is its portfolio restructuring. The company has divested underperforming segments and has acquired companies in new areas, as management is willing to reshape its portfolio toward the best future opportunities.

In total, we see 7% average annual earnings-per-share growth in the next five years for Cintas.

Competitive Advantages & Recession Performance

Cintas has a distinct operating advantage, which is its vast distribution network. For example, Cintas has more than 11,000 local delivery routes.

It is the largest company in its industry, which gives it market control. It would be very difficult for a new competitor to enter the market and try to disrupt Cintas’ business model, even more so after the G&K purchase. This helps keep competition at bay as Cintas has a highly entrenched customer base. Its distribution capabilities and reputation for quality provide Cintas with high margins.

While Cintas is a high-growth business, it is also reliant on a healthy global economy. When the economy goes into recession, companies hire less and often reduce headcount. This results in reduced demand for the products Cintas manufactures. Cintas had a difficult time growing earnings-per-share during the Great Recession, despite the fact that the recession officially ended in 2010.

The company’s earnings-per-share for 2008-2010 are shown below:

As you can see, Cintas struggled during 2009 and 2010, with two consecutive years of double-digit earnings declines. This reflects how closely the profits of the business are tied to the condition of the economy. At the same time, Cintas remained profitable, which allowed it to continue increasing dividends each year. The company’s dividend also appears to be quite safe at current levels.

And, Cintas quickly emerged from the recession. The company grew earnings-per-share by 13% and 35% in 2011 and 2012, respectively. Given that the risk of recession in the near term is relatively high, investors should be wary of the effects of an economic downturn on Cintas’ earnings capabilities.

Valuation & Expected Returns

Based on expected earnings-per-share of $12.75 for fiscal 2023, Cintas stock trades for a price-to-earnings ratio of about 34.2X. This is a very high valuation against the broader market and Cintas’ own historical valuations. Our fair value estimate is a P/E ratio of 28 for Cintas stock.

If the stock were to return to our fair value estimate price-to-earnings ratio over the next five years, shares would decline by about 3.9% annually from valuation multiple contraction. As a result, Cintas is significantly overvalued. Earnings-per-share growth (expected at 7% annually) and the 1.1% dividend yield will offset the negative returns from a falling valuation multiple. But overall, total returns are estimated at just 4.0% per year over the next five years.

Cintas’ valuation today is high, and we believe investors should avoid the stock as a result.

Final Thoughts

Cintas is a very strong company with a high earnings and dividend growth rate. However, Cintas appears to be trading at a rather elevated valuation, with shares standing resilient against the overall market’s sell-off over the past year.

Another consequence of shares hitting new all-time highs continuously in recent years is that the stock has a low dividend yield below the average of the S&P 500 Index.

While the company has a secure dividend payout with room for future dividend increases, the stock is overvalued. We rate it a sell despite its superior fundamentals solely because the valuation is so rich.

Suppose Cintas returns to a normalized valuation at or below our fair value estimate. In that case, it could earn a buy recommendation again because of its strong growth and high-quality business.

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:

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