Dividend growth investors often flock to the Dividend Aristocrats as these companies are considered to be the gold standard when it comes to companies that increase dividends payments to shareholders. Membership is so exclusive in this group that there are just 65 companies in the S&P 500 that have raised their dividends for at least 25 consecutive years.
One of the more impressive names in the Dividend Aristocrats is Cintas Corporation (CTAS, Financial), which has one of the highest and most consistent dividend growth rates in the market place. The stock has also vastly outperformed the market index over a long period of time.
The last five years have seen shares of the company gain almost 177%. For comparison purposes, the S&P 500 is up just 43% during this time. But beyond just the increase in share price is Cintas’ dividend growth history, which might make the company the perfect dividend growth stock in my view.
Company background and recent results
Cintas offers a variety of services and products to customers, including corporate uniforms, restroom supplies, first aid equipment, fire protection and entrance mats. Uniform rental and facility services contribute the bulk of annual revenues, but safety equipment and uniform sales are also important to the top-line performance.
The company has a vast customer pool of more than 1 million businesses globally. Major markets include North America, Latin America, Europe and Asia.
Cintas reported results for its second quarter of fiscal year 2023 on Dec. 21, 2022. Revenue for the period grew 13.1% to $2.2 billion, which was $48 million more than analysts had expected. Earnings per share of $3.12 compared to $2.76 in the prior-year quarter and beat estimates by 9 cents.
Organic growth for the quarter was up 12.8% as Cintas continues to see new customer wins.
Higher energy prices ticked up 10 basis points for the period, but the gross margin still expanded 100 basis points to 47%.
Cintas has long been a growth company. Revenue has a compound annual growth rate of just under 7% over the last 10 fiscal years, according to Value Line. Bottom-line performance has been the real standout during this time as earnings per share have a CAGR of 18.1%. A lower share count has aided this growth, but net profit still compounded at 16% over the last decade as the profit margin more than doubled.
This high level of growth is expected to continue. Following second-quarter results, management raised guidance for the fiscal year. The company now expects revenue of $8.67 billion to $8.75 billion, up from $8.58 billion to $8.67 billion previously, and earnings per share of $12.50 to $12.80, up from $12.30 to $12.65 previously. At the midpoint, this represents growth of 10.9% and 12.1%, respectively, from the prior year.
Dividend and valuation analysis
Cintas has a very high GF Score of 96 out of 100, which implies that the stock could see continued outperformance going forward based on historical studies conducted by GuruFocus. This score is driven by perfect scores on profitability and growth, a very high score on momentum and middling scores on value and financial strength.
Cintas’ ability to grow its business over long periods of time has laid the groundwork for the company to become a Dividend Aristocrat. Shareholders have received a dividend raise for 40 consecutive years.
Shares of Cintas yield just 1%, which is less than the average yield of the S&P 500. The stock has never been a high yielder as the 10-year average is just 1.2%. Shares of Cintas don’t offer much in the way of income, but that is partially because the stock price has increased so much over the past few years.
It’s the dividend growth, and not necessarily the yield, that I find attractive. The growth has been equal parts aggressive and consistent over long stretches of time. For example, the dividend has a CAGR of 24% over the past five years, which is above the 10-year CAGR of 22%. More recently, the dividend was increased 21% for the Sept. 15, 2022 payment date., slightly below the medium- and long-term averages.
Despite the size and consistency of the dividend increase, future growth looks to be likely as well. The current annualized dividend of $4.60 would represent a payout ratio of just 36% for the fiscal year using company earnings estimates. This is just ahead of the 10-year average payout ratio of 28%, but not to a level where high dividend increases are likely to be pulled back. The most recent increase is a reflection of Cintas’ ability to continue to provide 20%+ raises every year.
Free cash flow shows the same. Cintas has distributed $412 million of dividends over the last year while generating free cash flow of $1.2 billion for a payout ratio of 34%. This is nearly in-line with the average free cash flow payout ratio of 30% since fiscal year 2019.
Shares of the company aren’t cheap at 35 times forward earnings, but double-digit earnings and dividend growth rarely are.
That said, even with the gains in the stock over the past few years, Cintas appears to be just reasonably valued based on the GF Value chart.
With a current share price of $446.23, Cintas has a price-to-GF-Value of 1.02, making it fairly valued based on GF Value.
Final thoughts
Cintas has a proven itself over the long-term in its ability to produce high levels of growth in its business. This has resulted in dividend increases that are often above 20% per year. This is widely unheard of as growth typically slows down as the dividend becomes larger.
This hasn’t been the case for Cintas as the earnings and free cash flow payout ratios still remain in a very healthy range. In fact, the most recent increase shows that shareholders can likely expect similar type raises in the future, especially given the projected growth in the business for fiscal year 2023. In this way, I believe Cintas is the perfect dividend growth stock because the increases have not shown any sign of slowing down.
