Dividend Champions come in all sizes, though most investors are probably familiar with the larger names that have been raising dividends for decades.
One smaller company that has nearly three decades of dividend growth and appears poised for future increases due to its sound business model is Badger Meter Inc. (BMI, Financial).
Company background and results history
Badger Meter manufactures the meters and valves that are used to measure and control the flow of air, gases and liquids. The company receives the bulk of its revenue from municipal water utilities, but Badger Meter’s products are used in end markets such as chemicals, HVAC and oil and gas. The $2.4 billion company generates annual revenue of $505 million.
The company reported first-quarter earnings results on April 19. Revenue grew 12.4% to $132.4 million, while earnings per share of 49 cents compared favorably to 47 cents in the prior year.
The water utility business was quite strong, with revenue growing 15% compared to the prior year. This growth was due to a variety of factors, including strong order activity, backlog conversion and acquisitions. The company is experiencing supply chain disruptions, which was the driving force in sales of flow instrumentation products coming in flat compared to the prior year.
Inflationary pressures also contributed to a 360-basis point decline in the operating margin, though this was compared to a new record in the first quarter of 2021. The increase in input costs did impact bottom-line performance, but Badger Meter plans to offset these expenses with higher realized prices. Switching costs are high in this business and the company’s products are considered industry leading, so raising prices should not dent demand. This is supported by Badger Meter seeing its backlog reach a new record level during the quarter.
Badger Meter has performed very well in the long term, leading to a compound annual growth rate of almost 9% for earnings per share since 2012. This is due largely to the company’s advanced products. For example, the company’s Beacon and Orion products combine to allow water utilities to monitor operations and detect water leaks as they happen. These products have seen increased demand among customers as they can save the utilities on costs.
Wall Street analysts surveyed by Yahoo Finance project earnings per share of $2.18 for 2022, which would mark a nearly 5% increase from last year’s record.
Ranking versus peers
Badger Meter has leveraged its industry-leading technology into strong fundamentals. The company is currently operating at a very high level on a number of metrics, both against its own historical performance as well as that of the broader industry.
Badger Meter receives a 10 out of 10 from GuruFocus on financial strength, as it scores well nearly everywhere. For starters, the company has zero debt, which places its cash-to-debt ratio above 99.9% of its industry group. Because of this, interest coverage is abundant and the Altman Z-Score ranks as very safe as lack of debt should keep the company from going bankrupt. The Piotroski F-Score is solid, reflecting Badger Meter’s financial strength. Lastly, the company’s return on invested capital of 15.3% is nearly three times its weighted average cost of capital of 5.5%.
Badger Meter’s profitability rank is also a perfect 10 out of 10.
The company is above the majority of its peers in every category. Operating margin, return on equity, return on assets and return on invested capital are better than at least 80% of the competition. Nearly every score is near the top end of the company's 10-year historical performance. It is not just leaving the competition behind; Badger Meter is outshining its own historical record.
Badger Meter receives another high score on growth, this time 9 out of 10. The one area where the company has been weak compared to its peers is on three-year revenue growth, though this is middle of the pack. Nearly everywhere else the company is ahead of two-thirds to three-quarters of the competition. Three-year earnings per share without nonrecurring items is especially strong.
With high marks almost across the board, Badger Meter receives a GF Score of 94 out of 100. Based on the fundamentals, the company’s business looks to be in good shape, which should help support the dividend.
Dividend safety analysis
Badger Meter’s dividend yield is on the low side at 1%. The stock has rarely offered much in the way of income, averaging a yield of just 1.3% since 2012. However, this is more of a product of an increase in share price than a question of commitment to growing the dividend.
The company’s dividend has a CAGR of 9.7% over the last decade, but this growth rate accelerates to almost 12% when looking at the last five years. This includes an 11.1% increase for the Sept. 10, 2021 payment date, which extended the company’s dividend growth streak to 29 years. Shareholders can expect the next dividend raise to be announced near the end of August if Badger Meter sticks to its usual schedule.
Badger Meter has managed aggressive dividend raises for the last decade because the company’s business continues to expand. Despite double-digit average increases for the last 10 years, the payout ratios have been in a tight range.
The company distributed 76 cents of dividends per share in 2021 while earning $2.08 for a payout ratio of 37%. Shareholders should see dividends of at least 80 cents per share this year. Based on analysts’ estimates, the projected payout ratio is also 37%. Both figures are very close to the 10-year average payout ratio of 39% for the company.
Using free cash flow as a lens into dividend safety shows that distributions are well covered. Over the last year, Badger Meter has distributed of $23 million of dividends while generating free cash flow of $60 million for a payout ratio of 38%. This is above the average free cash flow ratio of 27% since 2018, but still in a very safe range.
Because the company currently has zero long-term debt, all available capital can be used to cover dividend payments. This should provide an extra layer of security to Badger Meter’s dividend.
Valuation analysis
Badger Meter has faced a difficult year along with much of the market.
The stock is down more than 23% year to date, though this has led to an improvement in Badger Meter’s valuation.
The GF Value chart, which uses a variety of metrics to determine fair value, shows the stock is undervalued.
Badger Meter closed on Friday at $81.76. The stock has a GF Value of $92.35, resulting in a price-to-GF Value of 0.89. Reaching the GF Value would mean a 13% gain in the share price.
Final thoughts
Badger Meter is a small company, but is very much a leader in its industry. The company has a portfolio of advanced products that are in demand from customers. This technical advantage has enabled Badger Meter to grow its dividend for a long period of time. And with reasonable payout ratios and no long-term debt, the company’s dividend is poised to continue to grow at a fast pace.
At the same time, Badger Meter’s stock is trading at a discount to its intrinsic value not seen since late 2020. For investors looking for an entry point into the name, now could prove to be an opportunity to purchase shares of the company at a more reasonable valuation.
