Roper Technologies Stock is one of the few software and applications development companies that are included in the S&P 500 Dividend Aristocrats index. The dividend aristocrats are stocks that have raised dividend payments for 25 consecutive years without failing a single year. Hence, they are some of the best dividend blue chip stocks investors can own.
Roper’s Management last raised dividend payment by 11% from $0.4625 per share in October 2019 to $0.5125 in January 2020. This level of growth is very healthy and the stock is highly rewarded by shareholders. To put icing on the cake, Roper Technologies has raised dividend payments for 27 consecutive years.
In this article, we review the company’s business operations, explore latest financial results, dividend growth history, stock’s valuation and long term performance relative to the S&P 500 and its peers in the S&P 500 Industrials (XLI) sector.
Roper Technologies is a diversified technology company that operates many smaller businesses that design software used as licenses and software as a service (SAAS) subscriptions, as well as industrial and engineered products used in a variety of niche end markets. The company reports financial results in 4 operating segments. They are:
- Application Software
- Network software and systems
- Measurement and Analytical Solutions
- Process Technologies
Attached screenshot from the company’s Barclays Conference in February 2020 summarizes the company as 45 independent businesses with leadership positions in key niche markets.
For competitive business strategy, management strives to acquire high gross margin businesses that are light on capital expenditures, have strong customer retention and generate recurring revenues.
In terms of revenue sources, 29% is derived from Application software such as Deltek used by professional firms for project management and accounting and time and expense management.
Another example is CBORD Software used by colleges and institutions for cashless payment systems, security, hosting and management all on the cloud. Aderant is another software used by lawyers for time and billing.
The next biggest source of revenue is Network Software and Systems generating 27% of total revenues.
Examples of software under this segment include ConstructConnect used by subcontractors, building product manufacturers and general contractors for tasks like bid management, plans and pricing. DAT Freight Software is used by transportation companies and freight brokers for integrated accounting systems, document imaging and retrieval, freight tracking, etc.
The largest source of revenue is measurement and analytical solutions generating 31% of all revenues for 2019 with software such as CIVCO medical solutions, Hansen, Logitech, Neptune and Verathon. The 4th segement is process technologies selling industrial software such as AMOT, CCC, Cornell, Metrix, etc.
We like this stock due to its explosive growth. In fact, presentation attached below shows how the company has grown over the last 9 years and deployed over $10 billion to make highly profitable acquisitions.
It spent $6.9 billion spent acquiring application software companies and another $3.1 billion spent to acquire network software and systems companies.
Revenue Analysis and Share Buybacks
For full year 2019, Roper Technologies generated $5.38 billion in revenues, a 3% growth over 2018’s revenues of $5.2 billion. Earnings before Interest, Depreciation, Taxes and Amortization (EBITDA) came in at $1.925 billion, a 6.6% growth over 2018’s EBITDA of $1.806 billion. Gross margins expanded by 110 basis points coming in at 63.9%, which is a spectacular performance.
Over the last decade, management has grown revenues from $2.05 billion in 2010 to $5.38 billion in 2019. This represents a compounded annual growth rate (CAGR) of 10% which is phenomenal!
There are not many companies that have grown revenues at 10% annualized over the last decade. Roper Technologies happens to be one of the few special ones. Granted, a large part of this growth is due to profitable acquisitions explained above in the Business Synopsis section.
Trading on the New York Stock Exchange under the ticker ROP, Roper Technologies sports a $38.3 billion market capitalization and pays a 0.6% dividend yield. Even though this yield is low, the company has grown dividends at a compounded annual growth rate (CAGR) of almost 17% over the last 5 years.
Management has a mandate of acquiring highly profitable software development companies with a high customer retention and satisfaction in various end niche markets. It finances these acquisitions through free cash flow generated by other segments.
As a matter of fact, Roper Technologies has grown free cash flow from $639 million in 2012 to $1.438 billion in 2019, representing a compounded annual growth rate (CAGR) of 12.3%.
In 2019, the company deployed $2.4 billion to acquire Foundry and iPipeline, 2 profitable software companies. Foundry develops software used for visual effects and 3D animations and generates $75 million in revenues. The monster acquisition was of iPipeline, a cloud based software used in life insurance and annuity industries. The company generates $200 million in annual revenues and was purchased for $1.625 billion.
For Q1 earnings released on Apr 28th, 2020, Roper Technologies reported revenues of $1.35 billion, a 4% organic growth year over year from 2019’s Q1 revenue of $1.288 billion. Positive organic growth was seen in 3 of the 4 business segments with Earnings before Interest, Taxes, Depreciation and Amortization (EBITDA) coming in at $467 million.
Application software segment generated $405 million in revenues and $156 million in EBITDA. This segment grew 5% organically year over year with 38.6% margin. 70% of this segment’s revenues are recurring due to large enterprise customers in established sectors including government agencies, law firms, health care and education.
Measurement and Analytical Solutions segment saw organic revenue growth of 3% generating $365 million in revenues and $123 million in EBITDA. The weakest segment was Process Technologies seeing a 10% revenue drop year over year due to a slump in oil prices and less demand from upstream/downstream refiners.
The company is well capitalized with $1 billion in cash and $2.5 billion in a revolving credit line. What concerns us however is the large long term debt of $4.277 which is rated as investment grade.
However, due to strong free cash flows and high margins, the company should not have any problems servicing the interest payments on the debt.
For full year 2020, management expects diluted earnings per share to be in between $13.30 to $13.6 per share and organic revenue growth of 6% to 7% and between 3% to 4% if TransCore is excluded.
Dividend Growth History
Roper Technologies is a member of the prestigious S&P 500 dividend aristocrats index having raised dividends for 27 consecutive years. As a matter of fact, the company has grown dividends from just 1.5 cents per share in 1992 to $1.85 per share in 2019.
This represents a compounded annual growth rate (CAGR) of 19.5% over a period of 27 years. This is a spectacular long term performance!
Attached chart shows a steady and steep uptrend in Roper’s dividend growth since 1992. Notice the uptrend taking off starting from 2011 as the economy recovers from the great financial crisis.
Attached chart shows the year over year percentage growth in Roper Technologies’ dividend payments. The company has grown dividends between 10% to 20% over the last 5 years.
Since Roper is a technology/software company, notice how the dividend growth fell from 1999 to 2003 from a high of 20% in 1998 to low single digits. This is due to the technology bubble of 2000s where excessive valuations in tech startups caused a huge market meltdown.
Measuring the Dividend Payout Ratio
Lets calculate the dividend payout ratio for Roper Technologies. 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, Roper Technologies generated $1.5 billion in cash flows from operations and spent $52.7 million in capital expenditures. What is the free cash flow?
Free Cash Flow = Cash from Operations – Capital Expenditures
Free Cash Flow = $1.5 billion – $52.7 million
FCF = $1.44 billion
For fiscal 2019, Roper Technologies paid out $191.7 million in dividends. Using this information, lets calculate the dividend payout ratio?
Dividend Payout Ratio = Total Dividends Paid / Free Cash Flow
Dividend Payout Ratio = $191.7 million / $1.44 billion
DPR = 18%
A dividend payout ratio of 18% is very strong leaving cash for future dividend increases, making smart and accretive acquisitions, share repurchases and increasing sales staff to grow revenues.
Long Term Performance
Roper Technologies Stock has risen in price from $7 in January 1995 to $367 as of May 2020. This represents a compounded annual growth rate (CAGR) of 18% over a period of 24 years. This is a phenomenal performance over almost 2 and a half decades.
Attached chart displays Roper Stock’s long term performance. During the great financial crisis of 2008, the stock dropped from a peak of $71 in October 2007 to trough of $35 in October 2008. This loss resulted in 51% of the stock’s value being wiped out, lower than the S&P 500’s drop of 56%.
Bloomberg Analysts’ Consensus expects Roper Technologies to earn $12.2 in earnings per share for 2020. Using the current stock price of $367.06 and dividing in to the expected earnings, we arrive at a forward price to earnings ratio of 30 times. As a comparison, the S&P 500 currently trades at a forward PE of 21 times earnings.
Roper Technologies is indexed in the S&P 500 Industrials (XLI) sector even though it is largely a software development conglomerate that owns smaller software development companies serving niche end markets.
Industrials are considered to be cyclical stocks that go through boom and bust cycles. While Roper Technologies trades at 30 times forward earnings, the S&P 500 Industrials Sector trades at 16.5 PE, making the stock more expensive than its peers.
Here is what we like and don’t like about Roper Technologies Stock.
- 27 years of growing dividends making this a dividend aristocrat stock.
- Dividend payout ratio of just 18%. This leaves lots of cash flow for making smart acquisitions that add to bottom line, increase dividends and repurchase shares.
- Revenue growth of 10% CAGR over 10 years due to skillfull management making profitable acquisitions and adding to the company’s strong list of software companies.
- 21.3% Earnings per share growth which is excellent performance.
- Management’s track record of acquiring software development companies serving key niche customers who would otherwise find it difficult to switch software providers, thus allowing Roper to keep high customer retention.
- Management has a large pipeline of high quality acquisition plans in the works, which should keep free cash flow, earnings and revenues growing.
- Low dividend yield of just 0.6%.
- 30 times forward earnings (PE) ratio which is quite expensive. Investors are paying a high premium for this stock and any economic downturn will force this stock to shed a large loss.
- High debt load of $4.277 billion is concerning.
|Market Capitalization||$38.3 Billion|
|Forward PE Ratio||30 times 2020 earnings|
|Dividend Growth (5 Year Avg.)||16.8%|
|Dividend Payout Ratio||18%|
|EPS Growth (5 Year Avg.)||21.3%|
|2019 Revenues||$5.38 Billion|
Roper Technologies (ROP) Ex Dividend Dates
Table below shows ROP Stock and Ex Dividend Dates. This information is gathered from the company’s Investor Relations | Dividends & Splits page.
|Ex-Dividend Date||Record Date||Announce Date||Pay Date||Amount||Frequency|
ROP Current Stock Price
To view the most recent quote for ROP Stock, visit the company’s Investor Relations website and select “Stock Quote.”