Published September 16th by Ben Reynolds
Nordson (NDSN) stock has been on a tear this year. The stock is up 46% year-to-date. For comparison, the S&P 500 ETF (SPY) is up 7%.
Nordson is a global industrial equipment manufacturer. This hasn’t exactly been a hot industry this year… And yet the company’s stock has performed phenomenally.
The company was founded in 1954. It currently employs over 6,200 people and has a $5.7 billion market cap.
Nordson has a long history of success. The company is a Dividend King with 53 consecutive years of dividend increases. You can see all 18 Dividend Kings here.
Despite its long history of rising dividends, Nordson is not a high yielding stock. The company currently offers investors a dividend yield of just 1.1%. The company only pays out around 25% of its earnings as dividends. Retained earnings are used to fuel growth and repurchase shares.
This article takes a look at Nordson’s strong performance this year.
Nordson: Growth Machine
Nordson has compounded its earnings-per-share at 10.7%% a year over the last decade. The company’s dividend payments have grown a bit faster – at 11.4% a year.
Nordson’s value per share will double around once every 7 years at this growth rate.
Double-digit growth over the last decade is excellent as the period covers the Great Recession. The company has averaged a return on equity of 26% a year over this time period. The company has managed to be exceptionally profitable over a long period of time.
In theory, a company with a 26% return on equity reinvesting around 75% of its earnings should be able to grow at 19.5% a year if the business were perfectly scalable. While the company isn’t expected to grow this fast, historical growth is impressive.
Earnings-per-share growth has come from a mix of share repurchases, profit margin growth, and increasing revenue:
- Revenue growth of 7% per year
- Share count reductions of 2% per year
- Margin improvements of 2% per year
The company’s growth is being driven primarily by revenue growth. This is the healthiest type of growth (especially combined with rising margins) because it shows that demand is increasing for the company’s products.
Nordson: Business In Focus
Nordson is well diversified by both geography and product type. The image below shows a graphical breakdown of the company’s diversification.
Source: Nordson Investor’s Presentation, slide 4
The company’s business has several compelling features.
First, it is not capital intensive. Capital expenditures have averaged around 3% of sales over the last 5 years. This is an exceptionally low number.
We’ve already discussed the company’s high returns on equity. Nordson’s low capital requirements give it strong cash flow generating power. Free cash flow before dividends has averaged 104% of net income over the last decade.
The company is committed to continuous improvement across all stakeholders – investors, employees, suppliers, and communities.
Source: Nordson Investor’s Presentation, slide 10
Nordson & Recessions
Nordson’s earnings-per-share declined from a high (at the time) of $1.77 in 2008 down to $1.20 in 2009 during the worst of the Great Recession.
A 27.5% earnings-per-share decline is never good, but the company performed well in a difficult operating environment. Industrial manufacturers tend to perform poorly during recessions as customers put off purchases until the economy settles.
Nordson’s adhesives dispensing segment is recession resistant. The segment helps buoy less resistant segmetns during recessions.
The adhesives dispensing segment sells various products to help create and apply adhesives. Much of the demand for this is from the packaged food and beverage industries, which are recession resistant.
Nordson’s Future Growth
A good starting point for Nordson’s future growth is its past growth over the last decade of around 10% a year.
The company’s organic growth will likely continue at its historical pace. Organic growth is driven through innovation and research and development expenditures. The image below shows the company’s research and development expenditures over the past several years.
Source: Nordson Investor’s Presentation, slide 29
As a global business, Nordson will also continue to grow its business faster in emerging markets than in developed markets. As free markets pull ever greater numbers of people out of poverty and into the middle class, demand for Nordson’s customers (and in turn Nordson) will continue to increase.
Nordson also grows its business through acquisitions. The company has spent 44% of capital on acquisitions over the past 5 years. The most recent acquisition for the company is LinkTech Quick Couplings, which was acquired on September 1st, 2016. Bolt-on acquisitions will propel Nordson’s growth.
Finally, the company regularly engages in share repurchases. I believe Nordson will continue compounding earnings-per-share at around 10% a year over the next several years – excluding any potential recessions.
Nordson investors have had much to be happy about over the last few months.
The company saw earnings-per-share surge 28% in its most recent quarter (8/22/16). Sales grew 6%. The company’s earnings-per-share growth was driven primarily by significant margin improvements.
Shortly before the earnings announcement, Nordson announced (8/12/16) its 53rd consecutive annual dividend increase. The company boosted its dividend 13%.
Nordson stock has performed exceptionally well this year. The strong stock performance is related to the company’s excellent performance this year.
Despite excellent underlying business growth, the stock price has appreciated faster than the underlying business has grown. Today, Nordson stock trades for a richer valuation than it did last year.
Valuation & Final Thoughts
Nordson stock is currently trading for a price-to-earnings ratio of 22.9. This is a bit below the S&P 500’s current price-to-earnings ratio of 24.7.
The company’s historical average price-to-earnings ratio over the last 5 years is around 18. If interests rates remain low, Nordson stock is certainly not overvalued. In the current market environment it is probably trading around fair value – even after the stock’s price run up this year.
If interest rates were to rise and the S&P 500 reverted to its historical average price-to-earnings ratio of around 15, Nordson would appear to be overvalued at current prices.
In today’s market, Nordson is likely trading around fair value.
Nordson is a high quality dividend growth stock. The company sports an above average return on equity, double-digit growth, and 53 years of consecutive dividend increases. On the downside, the stock has a small dividend yield, which makes it a poor choice for investors needing current income. The company is ranked as a hold using The 8 Rules of Dividend Investing at current prices.