Monday, October 27, 2014

Dividend Aristocrats In Focus Part 29

In Part 29 of the 54 part Dividend Aristocrats In Focus series, I take a closer look at corporate uniform provider Cintas (CTAS). Cintas designs, manufactures and implements corporate uniform plans. The company also sells various business products including restroom supplies, fire protection and first aid products as well as document management and safety services. The company went public in 1983 and has increased its dividend each year since that time, for a streak of 31 consecutive years with increasing dividends. Cintas has a market cap of $8.3 billion, making it smaller than many of the other Dividend Aristocrats previously analyzed. The company's business operations are detailed below.

Business overview

Cintas breaks its operations down into four segments. Each segment is shown below, along with percentage of total revenue generated from each segment.

Rental Uniforms & Ancillary Products: 70.8% of total revenue Uniform Direct Sales: 10% of total revenue First Aid, Safety, & Fire Protection Services: 11.3% of total revenue Document Management Services: 7.9% of total revenue

The company generates the bulk of its revenue from its rental uniform business which is at the core of what Cintas is. Its other business units are secondary and get a 'leg in the door' when a business already has a rental uniform agreement with Cintas.

Competitive advantage

Cintas corporations competitive advantage comes from its network of uniform processing facilities spread primarily across North America. The company currently has 391 facilities which it either owns or leases. This includes its 164 rental processing facilities and 110 rental branches, as well as its 8 distribution facilities and 5 manufacturing facilities. Cintas' strong distribution and service network for supplying and laundering uniforms is difficult to replicate for competitors. It would require a large amount of up-front capital to compete effectively with Cintas in business uniform services in North America.

Growth prospects

Cintas has grown revenue per share at nearly 7% per year over the last decade. The company has reduced its share count by about 3.7% per year over the last decade. The company's commitment to share repurchases has helped Cintas realize a strong revenue per share and dividend per share growth rate.

Going forward, Cintas will likely continue to grow at about the same pace it has over the last decade. The company's long-term organic growth is in line with overall business growth in the U.S. Demand for uniform services somewhat tracks the overall economy. As businesses prosper, they hire more employees and need more laundering services. When the economy contracts, employees are laid off, and less laundering is required.

Overall, shareholders can expect a CAGR of between 7% and 9% going forward from dividends (~1%) and organic growth (6% to 8%). The company may be able to grow more quickly by realizing efficiency gains as it continues to grow its size. Additionally, add-on acquisitions (none announced at this time) could also boost shareholder CAGR faster than the high single digit projections above.

Dividend Analysis

Cintas currently has a dividend yield of about 1.2%. The company has a low payout ratio of around 30%. Cintas' dividend payments are in no danger of being cut due to the company's low payout ratio and consistent growth. The company's fairly low yield and payout ratio are somewhat misleading, as management rewards shareholders with strong share repurchases rather than dividends. If the company

Cintas recently announced a special dividend of $1.70 (about 2.4% yield at current prices) payable to shareholders of record as of November 7. The special dividend is due to the company's deal with Shred-It-International to combine their document management business into a new joint-venture. The joint venture will be owned 42% by Cintas and 58% by Shred-It International. Shred-It also paid Cintas $180 million in the deal, which is the source of the special dividend funds. The joint-venture will improve Cintas' document management and destruction capabilities while providing the company with greater international exposure. While not immediately accretive to EPS, the acquisition is a solid long-term strategic move.

Going forward, Cintas will likely raise its dividend payments slightly faster than overall company growth due to its fairly low payout ratio. I expect dividend per share growth of around 10% a year over the next several years due to growth and modest payout ratio expansion. Despite solid dividend growth, the company's low yield makes it unappealing for investors seeking current income.


Cintas has historically traded at a premium of about 1.1x to the S&P500's valuation multiple. This is likely due to the company's competitive advantage and solid long-term growth. Cintas currently has a PE ratio of about 23.7, versus the S&P500's current PE ratio of about 19. Using the 1.1x premium multiplier, Cintas should be trading at a PE ratio of around 21 at current market prices. If the S&P 500 reverts to its historical average PE ratio of about 15, Cintas fair value would be around 16.5. At current market prices, Cintas appears somewhat overvalued. The company is not expected to grow rapidly, and has a fairly low yield. Its high premium over the S&P 500's PE ratio does not appear to be fully warranted.

Recession performance

Cintas remained profitable through the Great Recession of 2007 to 2009. As mentioned earlier in this article, the company's growth tracks overall economic activity. As a result, Cintas saw significant downturns in its EPS in 2009 at the peak of the Great Recession of 2007 to 2009. The company's EPS for 2007 to 2012 are shown below to give you an idea of how long it took the company to recover to new EPS highs after the Great Recession:

2007 EPS of $2.09 2008 EPS of $2.15 2009 EPS of $1.83 2010 EPS of $1.49 20

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