Dividend Aristocrats

Ecolab Stock; a 27 Year Dividend Aristocrat

Ecolab Stock is a member of the S&P 500 Dividend Aristocrats index. These are companies that have raised their dividends for at least 25 years and not missed even one. As of 2019, there are 57 such companies.

Not many companies can boast an 82 year dividend payment history; but Ecolab does. Management last raised its dividend by 9.5%, from $1.69 per share in 2018 to $1.85 in 2019.

In this article, we provide a synopsis of the company’s business, financial analysis of 3rd Quarter 2019 and 2018 annual report, dividend growth history and compare its valuation and performance to that of the S&P 500 Index.

Business Synopsis

Ecolab Inc. is a manufacturer of water, hygiene and energy technologies that serve to protect people, infrastructure and vital resources of this world. Ecolab’s products are used in water treatment, pollution control, oil production, energy conservation, metals manufacturing, paper making, and other industrial applications.

Employing 49,000 workers, Ecolab helps companies optimize water usage, maintain clean environments, reduce energy usage and make operational efficiencies in 170 countries.

This attached screenshot shows some of the company’s achievements including milestones like saving 188 billion gallons of water, serving 45 billion meals and helping generate 22% of the world’s power.

Ecolab Services Offered

Source: Investor Presentation

The company is at the forefront of four global trends that will impact humans around the world. They are clean water, safe food, abundant energy and healthy environments.

Trend#1 According to the United Nations, 700 million people worldwide could be displaced due to water scarcity. Ecolab provides key support to many of its customer’s operational processes including cleaning and sanitizing water, boiling and cooling water treatment, wastewater treatment and optimizing water quality.

Trend#2 According to the World Health Organization, 420,000 people die every year due to contaminated food. Link Ecolab provides effective cleaning and sanitizing products and services to ensure food safety and quality.

Revenue Analytics & Share Buybacks

For full year 2018, Ecolab generated $14.67 billion in revenues and earned $1.43 billion in net income, implying a 9.7% net profit margin. Revenues grew 6% year over year from 2017 ($13.84 billion).

Over the last decade, Ecolab has grown its revenues from $6.09 billion in 2011 to $14.67 billion in 2019. This translates to a  compounded annual growth rate (CAGR) of 9.2%.

Trading on the New York Stock Exchange, Ecolab has a $55.63 billion market capitalization and pays a 0.97% dividend yield. This yield is lower by 100 basis points versus the yield provided by S&P 500 index.

58% of Ecolab’s revenues came from North America, 19% from Europe, 12% from Asia Pacific and remainder from Latin America and Middle East/Africa. This shows Ecolab’s business operations are truly globally diversified and as the world’s population rises, so is this stock’s growth potential.

Management is rewarding shareholders with both rising dividends and share buybacks. Ecolab repurchased $5 billion worth of shares in 2018, up 11% from 2017 when it bought back $4.5 billion.

Growth Outlook

Ecolab has a total addressable market of $130 billion in revenues as of 2020. It currently has around a 10% market share leaving room for future growth through accretive acquisitions.

Management has achieved a terrific track record of growing earnings per share in the double digit range; namely 11% compounded annual growth rate since 2004.

As indicated in the screenshot, this performance is 80% better than the rest of stocks in the S&P 500.

In it’s 3rd Quarter 2019 earnings results, Ecolab reported revenues of $3.82 billion, a 2% growth year over year. Operating income was $587.6 million and adjusted earnings per share grew 12% year over year to $1.71 per share.

Douglas Baker, Ecolab’s CEO quotes, “We performed well in the quarter as we overcame softer industrial and energy markets and unfavorable foreign exchange to deliver 12% adjusted earnings per share growth. Our strong pricing and disciplined cost control efforts, in a market where delivered product costs have moderated, drove strong margin improvement.”

Management lowered its full year 2019 adjusted EPS guidance from a previous outlook of $5.80 to $6 per share to $5.80 to $5.90 per share. Global Industrial unit grew 5% year over year, while Global Institutional grew 4%. Global Energy declined 3% year over year.

Dividend Growth History

Ecolab stock is a member of the S&P 500 Dividend Aristocrats Index, an elite group of companies that have not only paid dividends for at least 25 years, but consecutively raised them each year as well.

Ecolab has grown its dividend from 8 cents per share in 1989 to $1.85 per share in 2019, a stunning 2300% growth in 30 years.

This amounts to a compounded annual growth rate (CAGR) of 10.9%. Over the last 5 years, the company has grown its dividend by an average of 10% annualized, keeping up with its long term growth rate.

Chart attached shows % growth in Ecolab Stock’s dividend year over year since 1989. We can see every year, the growth has been positive. Even during the great financial crisis of 2008 to 2010, management grew its dividend by 11.5%, 8.5% and 11.3% respectively.

Measuring the Dividend Payout Ratio

Ecolab is a dividend aristocrat stock because it has raised its dividend each year for the last 27 years. How awesome is it for investors to be able to invest in a company that helps the world be clean, healthy and safe while collecting growing dividend checks each month?

Lets examine the the dividend payout ratio for Ecolab 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 its 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 its 2018 annual report, cash generated from operating activities is $2.3 billion. Capital expenditures came in at $847.1 million. Let’s calculate the free cash flow.

Free Cash Flow = Cash from Operations – Capital Expenditures

= $2.3 billion – $871.1 million

Free Cash Flow = $1.429 billion

Dividends Paid in 2018 = $496.5 million

Dividend Payout Ratio = Total Dividends Paid / Free Cash Flow

= $496.5 million / $1.429 billion

Dividend Payout Ratio = 35%

A dividend payout ratio of 35% is one of the best we have seen in all of the 57 dividend aristocrats. This leaves plenty of room for future dividend raises + repurchasing shares + accretive acquisitions.

Valuation and Long Term Performance

Ecolab Stock has grown from $1.7 in January 1980 to 104.64 as of January 2020. This is a stunning 6155% gain in 40 years translating in to a compounded annual growth rate (CAGR) of 10.8%.

During the great financial crisis of 2008, Ecolab dropped from its peak of $45.62 to as low as $25.74; an almost 44% drop.

Thanks to its great financials and stable dividend history, the stock did better than the S&P 500’s drop of 56% during the great financial crisis.

Stock Performance Versus S&P 500

Below is a 10 year chart comparing Ecolab Stock’s performance to that of the S&P 500 Index.

Ecolab’s performance is in red line while the S&P 500 is in blue.

As of January 2020, Ecolab Stock has risen 387% over the last 10 years handily out performing the S&P 500’s gain of almost 190%. The chart clearly shows Ecolab Stock always out performs the S&P 500 (red line is always above the blue line).

Executive Summary

Here is what we like and don’t like about Ecolab (ECL) Stock.

Likes

  • Consistent dividend payments for 82 years and growth for 27 years.
  • Even though the dividend yield is only 0.97%, dividend growth rate over last 5 years is 10%.
  • Dividend payout ratio of just 35% leaving room for future dividend raises.
  • Total addressable market of $130 billion of which only 10% is captured.
  • Lots of room for growth oriented acquisitions, share buybacks and stock price appreciation.

Dislikes

  • A valuation premium to the S&P 500. Trades at 33 times forward earnings while the S&P 500 trades at 17.6 times.
Market Capitalization $55.63 billion
Dividend Yield 0.97%
Forward PE Ratio 33 times earnings
Dividend Growth (5 Year Avg.) 10%
Dividend Payout Ratio 35%
EPS Growth (5 Year Avg.) 11%
2018 Revenues $14.67 billion
Gross Margin 44%
Net Margin 9.7%

Dividend History and Ex-Dividend Dates

Ex-Dividend Date Record Date Payable Date Amount Per Share
December 16, 2019 December 17, 2019 January 15, 2020 $0.47
September 16, 2019 September 17, 2019 October 15, 2019 $0.46
June 17, 2019 June 18, 2019 July 15, 2019 $0.46
March 18, 2019 March 19, 2019 April 15, 2019 $0.46
December 17, 2018 December 18, 2018 January 15, 2019 $0.46
September 17, 2018 September 18, 2018 October 15, 2018 $0.41
June 18, 2018 June 19, 2018 July 16, 2018 $0.41
March 19, 2018 March 20, 2018 April 16, 2018 $0.41

Source: Ecolab Investor Relations

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