Updated on April 20th, 2021 by Bob Ciura
Roper Technologies (ROP) has increased its dividend payout for 28 consecutive years, and as a result it is one of the Dividend Aristocrats.
The Dividend Aristocrats are a select group of 65 stocks in the S&P 500, with 25+ years of consecutive dividend increases. We believe the Dividend Aristocrats are among the best long-term investments that can be found in the stock market.
You can download a full list of all Dividend Aristocrats (along with important financial metrics that matter) by clicking on the link below:
In order to become a Dividend Aristocrat, a company needs a strong business model, durable competitive advantages, and the ability to withstand global recessions. Clearly, the Dividend Aristocrats are high-quality dividend growth stocks. Being a member of the group is no small accomplishment for Roper.
Even more appealing is Roper’s high dividend growth rate. The dividend has gone up nearly five fold since 2009. The most recent increase was a 10% raise in November 2020.
Even among the Dividend Aristocrats, dividend hikes of 10%+ are rare, which makes Roper’s dividend increases over the last decade very impressive. This article will discuss Roper’s business, growth potential, and valuation.
Roper designs and develops software, including both software-as-a-service and licensed technology, and engineered products and solutions. Roper has a diverse portfolio of products and services, which it provides to a multitude of sectors, including healthcare, transportation, food, energy, water, and education.
Roper focuses on four main business segments:
- Application Software
- Network Software and Systems
- Measurement and Analytical Solutions
- Process Technologies
The Application Software business includes Aderant, CBORD, CliniSys, Data Innocations, Deltek, Horizon, IntelliTrans, PowerPlan, Strata, and Sunquest as its main products.
The Network Software and Systems business includes ConstructConnect, DAT, Foundry, Inovonics, iPipeline, iTradeNetwork, Link Logistics, MHA, RF Ideas, SHP, SoftWriters, and TransCore as its main products.
Measurement and Analytical Solutions include Alpha, CIVCO Medical Solutions, CIVCO Radiotherapy, Dynisco, FMI, Gatan, Hansen, Hardy, IPA, Logitech, Neptune, Northern Digital, Struers, Techhnolog, Uson, and Verathon.
Finally, the Process Technologies segment includes AMOT, CCC, Cornell, FTI, Metrix, PAC, Roper Pump, Viatran, and Zetec.
The company has generated an impressive track record of growth over the past five years.
Source: Investor Presentation
Roper has broadly benefited from the steady expansion of the U.S. economy over the past decade. We believe the company can maintain a positive growth trajectory for many years going forward.
Roper is in the unique position of generating strong growth across its business, even last year which was very challenging for the U.S. economy. Roper reported its Q4 and full-year results on January 29th, 2021, for the period ending December 31st, 2020. Quarterly revenues and adjusted EPS were $1.51 billion and $3.56, indicating a year-over-year increase of 8% and 5%, respectively.
Roper keeps on expanding its portfolio, and by taking advantage of the current ultra-low rates environment, the company deployed a massive $6 billion of capital towards high-quality software acquisitions through the year. The $5.35 billion purchase of Vertafone highlights the company’s financial resilience, as it was entirely funded using cash on hand, its credit facility, and debt.
Acquisitions are a key component of Roper’s growth strategy as it has spent well over $10 billion on acquisitions over the past decade.
Normally, such a high level of acquisitions would be a red flag, since many companies pay too high a price for under-performing businesses. However in this case, Roper’s acquisitions have clearly added value to the company.
Along with financial results, management updated its FY2021 guidance, expecting EPS of $14.35-$14.75 for the full year, with first quarter adjusted EPS of $3.26-$3.32.
Competitive Advantages & Recession Performance
Over the past several years, Roper pursued an asset-light business model, with a specific focus on software and engineered products and services. The company adopted this strategy to expand margins, by reducing capital expenditure needs, while also generating recurring revenue. This resulted in much stronger cash conversion over time.
Source: Investor Presentation
This provides Roper with tremendous competitive advantages. Its high margins and operational efficiency provide it with lots of cash flow that can be invested to stay ahead of the competition.
Another competitive advantage that Roper has is that it is highly diversified within the technology sector. It owns 45 independent businesses with leadership positions in niche markets. Furthermore, these end markets are quite diversified and offer strong recurring revenue and customer retention.
Investors should also note that Roper is a cyclical business. It has the capacity for very strong growth when the economy is expanding, but it also struggles during recessions. Earnings-per-share during the Great Recession are shown below:
- 2007 earnings-per-share of $2.68
- 2008 earnings-per-share of $3.06 (15% increase)
- 2009 earnings-per-share of $2.58 (16% decline)
- 2010 earnings-per-share of $3.34 (29% increase)
As you can see, Roper is not a highly recession-resistant company. Earnings-per-share declined 16% in 2009. If the economy were to enter a recession in the years ahead, Roper could see earnings decline.
While Roper’s earnings exhibited volatility, it still grew overall, from 2007 to 2010. As the U.S. recovered from the Great Recession, earnings continued to grow. We expect Roper to grow earnings-per-share at a rate of 10% annually through 2026.
Valuation & Expected Returns
Roper is a high-quality company, with strong growth prospects, thanks to the high level of demand for its technology. Therefore, it should not come as a surprise that the stock holds a premium valuation, as shares currently trade for a price-to-earnings ratio of 29.2. Its P/E multiple is above its average valuation over the past 10 years.
Given that the company is highly vulnerable to swings in the economy, we have a target price-to-earnings ratio for 2026 of 26. If shares were to revert to this target valuation within five years, annual returns would be reduced by 2.3% over this time. Potential overvaluation is a risk that investors should consider before buying the stock.
However, this will be offset by earnings-per-share growth (expected at 10% per year) plus the 0.5% dividend yield, resulting in total expected returns of 8.2% per year. This is a satisfactory projected rate of return for a strong business.
Roper has a high-quality business model and 10% annual earnings-per-share growth is not an unreasonable assumption moving forward. The stock is also a Dividend Aristocrat, and 10%+ annual dividend increases are also possible, thanks to the company’s high earnings growth rate.
Roper fits the bill of a great company, and while the stock appears to be overvalued, it could still generate solid returns for shareholders. Roper remains a high-quality dividend growth stock.