Dividend Aristocrats

Cintas Stock, a 36 Year Dividend Aristocrat

Cintas is one of 64 Dividend Aristocrats Stocks included in the S&P 500 index. These are 64 stocks that have consistently raised dividends every year for at least 25 years, without missing even one.

As a result, dividend aristocrats are some of the best free cash flow generating businesses that have withstood many economic boom and bust cycles and come out stronger on the other side.

They have profitable business models with a strong competitive moat, products that consumers love and return to purchase and shareholder friendly managements.

Cintas last increased its dividend by a whopping 26.5% from $1.62 per share in 2018 to $2.05 per share in 2019. The 5 year average growth rate in Cintas’s Dividend is 8.5%. This is a strong performance as the company has consistently raised dividends for 35 years in a row.

In this article, we will review Cintas business operations, latest financial results, dividend growth history, long term stock performance and valuation versus its peers and the S&P 500.

Table of Contents

This article is broken down in to sections, feel free to jump to the area that interests you.

Business Synopsis

Cintas sells various products and services that helps its corporate and small business clients polish their image and keep their offices and premises clean and safe. Cintas provides rental and servicing of uniforms and garments including flame resistant clothing, mops, shop towels, etc.

Serving over 1 million customers primarily in North America with smaller shares in Asia, Europe and Latin America, Cintas also sells first aid and safety products, fire extinguishers, floor care, and safety compliance training.

More than 80% of revenues come from uniform rental and facility services, with the remaining from first aid and safety and all other products. Customers of Cintas are representative of the economy with 70% of them in hospitality, retail, healthcare and food service sectors.

The remaining 30% of customers are in manufacturing or construction sectors. Attached screenshot from Cintas 2019 Annual Report shows revenue breakdown by year from 2017 to 2019.

Cintas has built a strong brand and competitive moat over the years and thanks to its 11,400 local delivery routes, 470 operations facilities and 11 distribution centers, it is able to quickly serve local businesses all over the United States with quality and on time products.

The company employs 45,000 people and has a track record of growing sales and profits in 48 out of the last 50 years. Prior to the great financial crisis of 2008, the company had 39 consecutive years of growth in profits.

Over the last 5 years, Cintas has grown its revenues from $4.369 billion in 2015 to $6.892 billion in 2019, which represents a strong 12.1% compounded annual growth rate (CAGR).

This is a very strong performance partly due to the strong performance of the US economy, low unemployment rate (unemployment has declined from 5.7% in Jan 2015 to as low as 3.5% in Dec 2019 with data from St. Louis Federal Reserve).

Revenue Analysis and Share Buybacks

For full year 2019, Cintas generated $6.892 billion in revenues, and earned a net income of $884.98 million, implying a net profit margin of 12.8%. Revenues grew 6.4% year over year from 2018’s total of $6.476 billion.

Earnings per share grew from $7.56 per share in 2018 to $7.99 in 2019, representing a strong growth of 5.7%.

Over the last decade, Cintas has grown revenues from $3.547 billion in 2010 to $6.892 billion in 2019. This represents a compounded annual growth rate (CAGR) of 7% which is quite strong.

Trading on the Nasdaq Exchange, Cintas sports a $21.24 billion market capitalization and pays a 1.25% dividend yield. This yield is quite low, in fact almost a full 1% lower than the yield on the S&P 500 index.

This is because Cintas Stock has run up in price rewarding investors with huge gains, thus its dividend yield shrinks as the stock price marches higher.

Thanks to its ability to source uniform raw materials from cheaper countries abroad, Cintas is able to maintain a high gross margin of 45%+ in the Uniform division and 48% in First Aid and Safety Services.

This makes the company a very profitable enterprise with products that businesses need as daily essentials, making this a vitally important business. Investors are rewarding this business model with a high valuation (more on this below on Stock Valuation section).

Cintas has grown revenues by making smart acquisitions including the buyout of G&K Services in August 2016. G&K Services is a market leader in branded uniforms and facilities services generating revenues of $1 billion.

The purchase price was $2.2 billion and allows Cintas management to achieve cost synergies of between $130 million to $140 million, thereby increasing net profit margins.

Cintas Stock has been rising due to management’s commitment to repurchase its own shares. The company has bought back $500 million worth of shares under a repurchase agreement initiated on August 2nd, 2016.

Additionally, management initiated a $1 billion buyback program on October 1st, 2018 which has no expiration date. About $534 million worth of shares were repurchased in 2019 under this program, leaving another half a billion to be repurchased.

Growth Outlook

For fiscal 3rd quarter ended February 29th, 2020, Cintas reported revenues of $1.81 billion, a 7.6% increase from the prior year’s third quarter. Earnings per Share grew 17.4% year over year and free cash flow was $300 million.

Organic revenues for the Uniform business grew 4.8% while the First Aid and Safety business grew 12.5%. Gross margin growth was strong at 9.2% from the same period last year to 45.5% of total revenues.

Scott Farmer, CEO and Chairman of Cintas quotes, “We continue to effectively deploy cash to increase shareholder value. In the third quarter of fiscal 2020, we paid an annual dividend of $2.55 per share, an increase of 24.4% over last year’s annual dividend. The amount paid to shareholders was $268.0 million.

We have increased the annual dividend for 36 consecutive years. In addition to the annual dividend, we utilized cash to purchase $393.1 million of Cintas stock in fiscal 2020 to date, including $200.0 million in March 2020. The amount remaining under our share buyback authorization is $1.1 billion.”

Areas of growth expected by management include serving only 1 million out of 16 million businesses in North America leaving a large market share to still be captured.

Dividend Growth History

Cintas is a dividend aristocrat stock having raised dividends for 36 consecutive years. The company has grown dividends from 8.3 cents per share in 1996 to $2.55 per share in 2019. This represents a stunning 16% compounded annual growth rate (CAGR) over 23 years.

Chart attached shows a steady uptrend in Cintas’s dividend growth. Since 2012, management has been growing dividends in the 20% range which is shown in this chart with a steep uptick in growth.

Chart below shows Cintas’s % growth in dividends year over year. Starting from 1997, dividend growth was in the 20% range, slowing to low single digits during the great financial crisis of 2008.

However, starting from 2012, management has been growing dividends in the higher double digits range exceeding 20%. This is thanks in part to a strong labor market with a very low unemployment rate.

Measuring the Dividend Payout Ratio

Lets calculate the the dividend payout ratio for Cintas Stock. Dividend Payout Ratio measures how much of a company’s free cash flow is paid out in the form of dividends.

Free cash flow is the cash a company generates from daily operating activities minus capital expenditures like investing in new plants or equipment.

Free cash flow is calculated from the statement of cash flows, and is not artificially modified using accounting rules or non-cash expenses like depreciation, amortization, fair value revaluations, etc.

In 2019, Cintas generated $1.067 billion in cash flows from operations and spent $276.7 million in capital expenditures. What is the free cash flow?

Free Cash Flow = Cash from Operations – Capital Expenditures

Free Cash Flow = $1.067 billion – $276.7 million

FCF = $790.3 million

For fiscal 2019, Cintas paid out $220.76 million in dividends. So what is the dividend payout ratio?

Dividend Payout Ratio = Total Dividends Paid / Free Cash Flow

Dividend Payout Ratio = $220.76 million / $790.3 million

DPR = 28%

A dividend payout ratio of 28% is very strong leaving cash for future dividend increases, making smart and accretive acquisitions, share repurchases and increasing sales staff to grow revenues. Since Cintas is a growth stock, it makes sense to keep the dividend payout ratio low so as to use more cash for growth activities.

Long Term Stock Performance

Cintas Stock Price has risen from $6.50 in January 1990 to $204 as of the time of this writing (April 2020). This represents a compounded annual growth rate of 12% over 30 years. This is a superb performance over a long period of time.

During the great financial crisis, Cintas Stock dropped from a high of $50 in April 2004 to as low as $20 in February 2009. This represents a drop of 60% from peak to trough. Due to the nature of the business, Cintas’ business does well when unemployment rate is low and declining.

Due to a spike in layoffs during the great recession, it is obvious Cintas Stock dropped more than the S&P 500 as it is exposed to the strength of the labor market and corporate profits.

Stock Valuation

Bloomberg Analysts’ Consensus expects Cintas to earn $7.81 in earnings per share for 2020. Using the current stock price of $204.16 and dividing in to the expected earnings, we arrive at a forward price to earnings ratio of 26 times.

As a comparison, the S&P 500 currently trades at a forward PE of 18.3 times earnings.

Cintas is indexed in the S&P 500 Industrial Sector (XLI) which means the stock is more volatile in nature than other “safe stocks” from Utilities, Consumer Staples and Real Estate sectors.

While Cintas trades at 26 times forward earnings, the S&P 500 Industrial sector trades at 17.5 times future earnings. This means Cintas Stock is trading at an almost 50% premium to its peers.

Executive Summary

Here is what we like and don’t like about Clorox (CLX) Stock.

Likes

  • 36 years of growing dividends making this a dividend aristocrat stock.
  • Dividend payout ratio of just 28%. This leaves lots of cash flow for making smart acquisitions that add to bottom line, increase dividend payout and repurchase shares.
  • Revenue growth in 48 out of the last 50 years. This company has withstood the test of hard times and has come out stronger.

Dislikes

  • Low dividend yield of 1.25% which is not very exciting because the share price has run up significantly.
  • High forward price to earnings ratio of 26 times 2020 earnings, versus the S&P 500 which is trading at 18.2 times forward earnings.
Market Capitalization $21.24 Billion
Dividend Yield 1.25%
Forward PE Ratio 26 times 2020 earnings
Dividend Growth (5 Year Avg.) 8.5%
Dividend Payout Ratio 28%
EPS Growth (5 Year Avg.) 7.5%
2019 Revenues $6.892 Billion
Gross Margin 46%
Net Margin 12.8%

 

 

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