Rollins: Its Dividend Was Cut, but Total Returns Remain Above Average

2020 year-end results show the company continues to grow profitably

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Feb 18, 2021
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Rollins Inc. (ROL, Financial) has had another good year thanks to the pests that often contaminate our residential and commercial buildings. It is the company that owns Orkin and 18 other pest control brands.

Unaudited results for full-year 2020 included:

  • Total revenue increased 7.2%.
  • Earnings per share jumped 30%, from 10 cents per diluted share to 13 cents.

Per-share information has been adjusted to account for a three-two share split that occurred on Dec. 10.

About Rollins

Rollins describes itself this way on its website:

"Through its wholly owned subsidiaries, the Company provides essential pest control services and protection against termite damage, rodents and insects to more than two million customers in the United States, Canada, Central America, South America, the Caribbean, the Middle East, Asia, the Mediterranean, Europe, Africa, Mexico, and Australia from more than 700 locations."

Based in Atlanta, Rollins has a market cap of $17.98 billion. According to its fourth-quarter earnings release, it generated $2,161,220 in revenue last year, compared with $2,015,477 in 2019.

Overall, it outperformed both the S&P 500 and the S&P 500 Commercial Services & Supplies Index (peer group) over the five-period that ended on Dec. 31, 2019:

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2020 will mark the 22nd consecutive year in which the company has increased its revenue.

Growth strategy

Acquisitions, large and small, but especially large, have been critical in driving the company's growth. We're still awaiting the final count for 2020, but it made 30 acquisitions in 2019, 38 in 2018 and 23 in 2017. Given the fragmented nature of the industry, Rollins can be seen as a consolidating player.

Competition

It lists its main competitors as Terminix Global Holdings Inc. (TMX, Financial), Ecolab Inc. (ECL, Financial), Rentokil Initial PLC (LSE:RTO) and Anticimex (private). Management says it believes Rollins competes favorably with competitors as the world's largest pest and termite control company.

Fundamentals

It earns a full five-star score for predictability, meaning there has been consistent growth of revenue per share and Ebitda per share over the past decade.

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As can be seen, Rollins receives a relatively high ranking for financial strength. It carries some debt, but the amount is manageable. On a trailing 12-month basis, the company has total current assets of $315 million (total assets equal $1.846 million) with total current liabilities of $474 million (total liabilities are $905 million).

The interest coverage ratio of 71.11 tells us it has enough operating income to pay its current interest expenses more than 71 times over.

The Piotroski F-Score is typical for a mature company and the Altman Z-Score indicates Rollins is extremely unlikely to go bankrupt.

The WACC versus ROIC comparison suggests this is a good company in which to invest. Its weighted average cost of capital is 4.26%, significantly lower than the return on invested capital of 14.39%.

Profitability

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A company that earns a 9 out of 10 rating for profitability likely has a strong moat and strong management.

The GuruFocus system warns the operating margin has declined, but, as this chart shows, that is now in the past:

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On the growth lines, we see a steady upward progression and the seasonality of revenue. They are both underlined by this chart:

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Charts for Ebitda and earnings per share without non-recurring items look much the same.

Dividend and share repurchases

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Rollins appeared to be on its way to becoming one of the dividend giants, a company with a history of raising its dividend each year for many years. But after 17 years of annual increases, Rollins will have to start over again if it still wishes to be an elite dividend stock.

In releasing its first-quarter 2020 results, it announced it was cutting the quarterly dividend from 12 cents to 8 cents. The cut was a response to the then-emerging Covid-19 threat and provided greater liquidity in case its finances tightened.

In what was likely a bid to appease shareholders, it did provide a special year-end dividend of 13 cents in connection with its third-quarter results. That would have made up the difference for the first three quarters plus a penny.

The company was maintaining its cautious policy when it made its latest dividend announcement on Jan. 26. It reported it would pay a dividend of 8 cents per share again for the fourth quarter.

Turning to the dividend yield, it may appear to be low, but the yield was also a victim of a rising share price:

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The dividend payout ratio is relatively low, so there is ample room to keep raising it.

Rollins began buying back shares in 2004 and continued on that track until 2018, when the number of shares outstanding began slowly moving in the opposite direction.

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The recent uptick can be attributed to executive and management compensation plans that provide "time-lapse restricted shares."

Returns

Regardless of dividends and share buybacks, the company has posted excellent annual returns. The GuruFocus system provides the following:

  • One-year: 39.10%
  • Three years: 19.22%
  • Five years: 26.03%
  • 10 years: 20.89%.

The following table shows total annual returns, by year, for the past decade:

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Valuation

To buy that much earnings power, you will need to pay a premium of sorts. Since hitting a peak of $42.11 in November, however, the share price has since pulled back by about 12.6%:

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That pullback is enough to let the GuruFocus system give Rollins a modestly overvalued rating:

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Both the price-earnings and the PEG (price-earnings divided by five-year Ebitda growth) ratios are high at 69.45 and 10.17. Both would suggest significant overvaluation.

All metrics considered, modest overvaluation is likely the best we can say of the share price.

Gurus

As the share price has risen, the gurus have been mostly net sellers:

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A total of five gurus had positions at the end of 2020, all of whom trimmed their positions during the fourth quarter. These three gurus had the largest positions:

  • Mario Gabelli (Trades, Portfolio) of GAMCO Investors owned 2,941,287 shares after a reduction of 35.58%. That gave him a 0.60% stake in Rollins and represented 1.08% of GAMCO's total assets.
  • Ron Baron (Trades, Portfolio) of Baron Funds reduced his holding by 33.61%, to 1,876,175 shares.
  • Tom Gayner (Trades, Portfolio) of Market Gayner Asset Management reduced his holding by 33.33% and ended the year with 1,243,275 shares.

Conclusion

As I noted in an earlier article about Rollins, cockroaches don't take holidays, meaning this company is relatively recession-proof. At the same time, it is well established in its industry and not seriously challenged by competitors. In addition, it is financially solid and highly profitable, resulting in above-average returns and total returns.

Because of its strengths, the stock is expensive, though we may debate by how much and whether the recent pullback has created a suitable entry point.

Growth investors who look at total returns may see this as a low-risk, high-return proposition. Income investors who are willing to sacrifice a bit of dividend income for capital gains could take a closer look. Value investors will want a deeper decline to carve out a margin of safety.

Disclosure: I do not own shares in any of the companies named in this article and do expect to buy any in the next 72 hours.

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