Updated on February 5th, 2021 by Nate Parsh
There are just 65 stocks on the list of Dividend Aristocrats, members of the S&P 500 Index that have raised their dividends for 25+ consecutive years.
You can download a free list of all 65 Dividend Aristocrats, along with important metrics like dividend yields and price-to-earnings ratios, by clicking on the link below:
In order to achieve Dividend Aristocrat status, a company must have clear competitive advantages that it can sustain over long periods of time. It must have a strong position in its industry, a highly profitable business model, and the ability to grow through innovation.
Ecolab (ECL) is a perfect example of a company that possess all of these qualities. This article will examine the various factors behind Ecolab’s rise to prominence, as well as our current rating of Ecolab stock.
Ecolab was created in 1923, when its founder Merritt J. Osborn invented a new cleaning product called “Absorbit”. This product cleaned carpets without the need for businesses to shut down operations to conduct carpet cleaning. Osborn created a company revolving around the product, called Economics Laboratory, or Ecolab.
Today, Ecolab is the industry leader and generates annual sales of roughly $15 billion.
Ecolab operates three major business segments: Global Industrial, Global Institutional, and Global Energy, each of roughly equal size. The business is diversified in terms of operating segments, and also geography. Approximately 40% of the company’s sales took place outside North America in 2019.
Source: Investor Presentation
The Global Industrial group provides water treatment, cleaning, and sanitation services. Customers in this segment are primarily large firms in the food and beverage, manufacturing, chemical, and mining industries.
The Global Institutional business provides specialized cleaning and sanitation services, such as on-premise laundry, housekeeping, and food safety. Customers are primarily in the foodservice, hospitality, lodging, healthcare, and retail industries.
Lastly, the Global Energy segment includes the Nalco brand. Nalco provides chemical and water treatment services to the petroleum and petrochemical industries, specifically to oilfield services and refineries. Ecolab spun off its upstream energy business in mid-2020.
Ecolab has many positive growth catalysts. One of the company’s most important growth catalysts is acquisitions. In 2016, Ecolab acquired UltraClenz, a developer of electronic hand hygiene systems and dispensers. It also acquired Anios, a European healthcare and hygiene business. These deals helped Ecolab expand its scale, particularly in the international markets.
In 2017, Ecolab announced the acquisition of Georgia Pacific’s paper chemicals business. The purchase will help boost Ecolab’s growing paper business, which helps paper manufactures improve their efficiency, product quality, and profitability.
More recently, Ecolab closed on its $56 million purchase of U.K. based Holchem Group Limited. Holchem Group Limited is a supplier of hygiene and cleaning products and services for the foodservice and hospitality industries. Previously, the U.K. antitrust authorities blocked the deal due to concerns regarding reduced competition, but the deal closed on May 13, 2020.
Ecolab has proven successful at integrating other acquisitions, so we remain positive on the company’s ability to do so in the future. Acquisitions such as these, along with organic investment, have fueled steady earnings growth for decades.
We feel that the company is well-positioned to continue to grow.
Source: Investor Presentation
The company maintains a leadership position in what is a highly fragmented and growing market. Ecolab’s sales dwarf the competition and yet the company has less than 10% market share. There remain ample opportunities for the company to continue to expand its reach.
However, Ecolab’s management has guided towards earnings-per-share of $4.50 for 2020, which would be a decline of 22.6% from the previous year. The company has felt the impact of the COVID-19 pandemic, especially in the industrial and institutional segment. That being said, we feel that Ecolab will see higher than usual demand following a recovery from COVID-19 and expect earnings-per-share to grow at a rate of 15% per year over the next five years.
Competitive Advantages & Recession Performance
Ecolab’s many competitive advantages include scale, a strong reputation among its customers, and innovation. Ecolab serves more than 1 million customer locations, spread across more than 170 countries. The company is not afraid to spend significant resources on research and development of new products and services.
Management refers to R&D spending as its “innovation pipeline”. Ecolab often spends more than a $1 billion on the innovation pipeline. Due in large part to this R&D spend, the company’s number of patents in nearing 8,000.
Ecolab’s R&D investments and intellectual property help the company stay ahead of the competition. Ecolab’s R&D investments have created an incredibly strong business, one that can hold up very well even during economic downturns. For clear evidence of Ecolab’s competitive advantages, look no further than its performance during the Great Recession:
- 2006 earnings-per-share of $1.43
- 2007 earnings-per-share of $1.66 (16% increase)
- 2008 earnings-per-share of $1.86 (12% increase)
- 2009 earnings-per-share of $1.99 (7% increase)
- 2010 earnings-per-share of $2.23 (12% increase)
Ecolab’s growth during the Great Recession was truly remarkable. Not only did the company generate positive earnings growth in each year of the recession, but in three of those years, it achieved double-digit earnings growth. This growth came during arguably the worst economic downturn in the U.S. since the Great Depression. Ecolab’s recession performance makes abundantly clear that the company holds sustainable competitive advantages.
Valuation & Expected Returns
Based on the current trading price of $209 and expected earnings-per-share of $4.50, Ecolab has a price-to-earnings ratio of 46.4. The stock has a five-year average price-to-earnings ratio of 27.8. We have a target price-to-earnings ratio of 20. If shares of Ecolab were to return to our target valuation by 2026, this would reduce total returns by 15.5% per year.
The stock is in danger of experiencing contraction of the valuation multiple, which would negatively impact total returns. Ecolab’s dividend is not likely to represent a large portion of total returns. This is because the current dividend yield is just 0.9%. This is less than the average dividend yield of the S&P 500 Index.
Following a 2.1% increase for the January 15, 2021 payment, Ecolab’s dividend growth streak now totals 29 consecutive years. This is an impressive growth streak, but we note that the most recent 2% raise was well below the 11.5% average increase that investors have enjoyed over the previous decade.
A breakdown of potential returns is as follows:
- 15.0% earnings growth
- 0.9% dividend yield
- 15.4% valuation reversion
We expect that Ecolab will offer a total annual return of 0.5% through 2026. This is a weak expected return, primarily due to the high valuation. The stock’s current valuation is well above our target, and a decline toward fair value would be a significant headwind for investors buying at the current price.
While Ecolab is an attractive dividend growth stock due to its high rate of dividend increases, it is not as appealing for income investors or value investors.
Ecolab is not likely to be an attractive stock for investors interested solely in high levels of income. That said, it is a very strong stock for investors interested in a recession-resistant business, and dividend growth.
Ecolab has an excellent track record of profitability and growth and is one of the few companies to have a dividend growth streak of at least 25 years. However, now is not the best time to buy the stock, due to its high valuation, low dividend yield and low projected total returns through 2026. Therefore, we rate shares of Ecolab as a sell.