Updated on January 31st, 2023 by Samuel Smith
Roper Technologies (ROP) has increased its dividend payout for 30 consecutive years, and as a result it is one of the Dividend Aristocrats.
The Dividend Aristocrats are a select group of 68 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 most recent increase was a 10.1% raise.
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 three main business segments:
- Application Software
- Network Software
- Technology Enabled Products
The Application Software business includes Aderant, CBORD, CliniSys, Data Innocations, Deltek, Frontline, IntelliTrans, PowerPlan, Strata, and Vertafore as its main products.
The Network Software business includes ConstructConnect, DAT, Foundry, iPipeline, iTradeNetwork, Loadlink Technologies, MHA, SHP, and SoftWriters as its main products.
Finally, the Technology Enabled Products segment includes CIVCO Medical Solutions, FMI, Inovonics, IPA, Neptune, Northern Digital, rf IDEAS, and Verathon as its main products.
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 when the broader U.S. economy faces challenges.
On January 27th, 2023, Roper reported its Q4-2022 and full-year results for the period ending December 31st, 2022. On a continuing operations basis, quarterly revenues and adjusted EPS were $1.26 billion and $3.92, indicating a year-over-year increase of 14% and 17%, respectively.
The company’s momentum during the quarter remained strong, with organic growth coming in at 7%. Organic growth was once again driven by broad-based strength across its portfolio of niche-leading businesses. Note that adjusted EPS of $14.28 for the year actually grew 15% compared to last year taking into account recent divestures.
You can see a breakdown of Roper’s performance by operating segment in the below image:
Source: Investor Presentation
Backed by Roper’s growth momentum, balance sheet strength, and a large pipeline of high-quality acquisition opportunities, management believes Roper is well positioned for continued double-digit cash flow growth. Roper initiated its adjusted EPS guidance for the FY2023, expecting it to land between $15.90 and $16.20, with a midpoint that implies a year-over-year growth of 12.4%.
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 has resulted in much stronger cash conversion over time and is likely to further increase its cash conversion ratio moving forward.
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 27 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 in the past, Roper was a cyclical business. It had the capacity for very strong growth when the economy was expanding, but also struggled 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 was 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. That said, it is important to note that Roper’s shift away from industrial businesses in favor of software businesses has made it more recession resistant as it now generates a lot more recurring revenue. As the chart below shows, 63.3% of its Q4 revenue was recurring or reocurring software revenue, and 76.5% of its Q4 revenue was software revenue.
Source: Investor Presentation
Given that it has over $4 billion in M&A capacity after the majority sale of its industrial business during Q4, it is very likely that its software revenue will only increase as a percentage of total revenues moving forward. This will likely make it more recession resistant than it was during the 2008-2010 recession.
It is also important to note that – while Roper’s earnings exhibited volatility during the last major recession – 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 2027.
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 26.3. Its P/E multiple is slightly above its average valuation over the past 10 years.
Given that interest rates have risen substantially over the past year, we have a target price-to-earnings ratio of 25. If shares were to revert to this target valuation within five years, annual returns would be reduced by 1.0% 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 0.6% dividend yield, resulting in total expected returns of 9.6% 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 stock is a buy.
Additionally, the following Sure Dividend databases contain the most reliable dividend growers in our investment universe:
- The Dividend Contenders List: 10-24 consecutive years of dividend increases.
- The Dividend Challengers List: 5-9 consecutive years of dividend increases.
- The Dividend Champions: Dividend stocks with 25+ years of dividend increases, including those that may not qualify as Dividend Aristocrats.
- The Dividend Achievers: dividend stocks with 10+ years of consecutive dividend increases.
- The Dividend Kings: considered to be the ultimate dividend growth stocks, the Dividend Kings list is comprised of stocks with 50+ years of consecutive dividend increases
If you’re looking for stocks with unique dividend characteristics, consider the following Sure Dividend databases:
- The Complete List of Monthly Dividend Stocks: stocks that pay dividends each month, for 12 payments over the year.
- The Blue Chip Stocks List: this database contains stocks that qualify as either Dividend Achievers, Dividend Aristocrats, or Dividend Kings.
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: