Up to date on April nineteenth, 2024 by Bob Ciura
Yearly, we individually assessment all of the Dividend Aristocrats. It’s because we view them as notably interesting shares for long-term dividend progress traders.
The Dividend Aristocrats are a choose group of shares within the S&P 500, with 25+ years of consecutive dividend will increase.
You possibly can see a full downloadable spreadsheet of all 68 Dividend Aristocrats, together with a number of essential monetary metrics corresponding to price-to-earnings ratios, by clicking on the hyperlink under:
Disclaimer: Positive Dividend just isn’t affiliated with S&P World in any method. S&P World owns and maintains The Dividend Aristocrats Index. The knowledge on this article and downloadable spreadsheet is predicated on Positive Dividend’s personal assessment, abstract, and evaluation of the S&P 500 Dividend Aristocrats ETF (NOBL) and different sources, and is supposed to assist particular person traders higher perceive this ETF and the index upon which it’s based mostly. Not one of the data on this article or spreadsheet is official knowledge from S&P World. Seek the advice of S&P World for official data.
The following Dividend Aristocrat in our 2024 sequence is A.O. Smith (AOS). A.O. Smith has elevated its dividend for 30 consecutive years.
This text will focus on A.O. Smith’s enterprise mannequin, progress prospects, and valuation.
Enterprise Overview
A.O. Smith is a number one producer of residential and business water heaters, boilers and water remedy merchandise. A.O. Smith generates two-thirds of its gross sales in North America, and a lot of the relaxation in China.
A.O. Smith was based in 1874 and is headquartered in Milwaukee, WI. The corporate generates annual gross sales above $9 billion.
Supply: Investor Presentation
A.O. Smith reported its fourth-quarter and full-year earnings outcomes on January thirtieth. The corporate generated income of $990 million throughout the quarter, which represents a rise of 6% in comparison with the prior yr’s quarter.
A.O. Smith’s income had been up by 7% in North America, whereas revenues noticed a smaller improve in the remainder of the world.
Earnings-per-share of $0.97 throughout the fourth quarter rose 13% on a year-over-year foundation. This was due to increased income, margin growth, and share repurchases that lowered the share rely.
A.O. Smith has introduced its steerage for 2024. The corporate is forecasting earnings-per-share in a spread of $3.90 to $4.15, which displays that administration expects earnings-per-share to develop meaningfully this yr.
On the midpoint of the steerage vary, earnings-per-share could be up 6% versus 2023. A.O. Smith is forecasting that income will improve by 3% to five% this yr.
Progress Prospects
A.O. Smith’s progress catalysts within the U.S. embody continued financial progress and rising housing costs. As a producer of water heating, water remedy, and air purification merchandise, the corporate is reliant on a financially wholesome client and housing market.
When residence costs are rising and unemployment is low, customers with disposable earnings are way more keen to put money into upgrades like new water heaters.
The corporate has loved constant progress within the home market all through a lot of the final decade.
Going ahead, rising markets corresponding to China are set to drive A.O. Smith’s progress.
Supply: Investor Presentation
China’s large inhabitants, its sturdy GDP progress, and its booming of its center class are main tailwinds on this essential market. As well as, due to the extreme air pollution of the nation, the demand for air purifiers ought to stay robust as effectively.
We anticipate A.O. Smith to develop earnings-per-share at a charge of 6% per yr by 2029. We consider the corporate ought to have the ability to obtain a minimum of this degree of progress as a result of natural income progress and share repurchases, with potential extra acquisitions including additional progress.
Aggressive Benefits & Recession Efficiency
A.O. Smith’s robust progress is because of its aggressive benefits, primarily its high market share. A.O. Smith has the #1 market share in U.S. water heaters. It holds over 30% home residential share and over 40% of the business market share.
Possessing the highest {industry} place offers A.O. Smith pricing energy and excessive margins. In flip, this offers the corporate the power to generate lots of money stream, which permits it to put money into new product innovation.
One potential danger for A.O. Smith is a recession. As a producer, the corporate is intently tied to the well being of the general economic system. It’s not a extremely recession-resistant enterprise mannequin.
Earnings-per-share throughout the Nice Recession are under:
2007 earnings-per-share of $0.48
2008 earnings-per-share of $0.49 (2% improve)
2009 earnings-per-share of $0.57 (16% improve)
2010 earnings-per-share of $0.43 (25% decline)
2011 earnings-per-share of $0.60 (39% improve)
As you possibly can see, the corporate carried out very effectively throughout 2008 and 2009, the worst years of the recession. Earnings took a big hit in 2010 however rapidly recovered in 2011.
Total, the corporate carried out exceptionally effectively, because it was nonetheless in a position to develop earnings over the course of the recession.
Valuation & Anticipated Returns
Based mostly on the present share worth of ~$86 and the midpoint of 2024 EPS steerage of $4.03, A.O. Smith shares at present commerce for a price-to-earnings ratio of 21.3. We consider a price-to-earnings a number of goal of 19 is an acceptable truthful worth estimate for AOS inventory.
In consequence, A.O. Smith appears overvalued proper now. If the P/E a number of had been to say no to the truthful worth estimate of 19, it could scale back annual returns by 2.3% over the following 5 years.
Shareholder returns can even be boosted by earnings progress and dividends, which collectively add as much as 7.5% annualized returns. In abstract, whole returns are anticipated to be 5.5% per yr over the following 5 years, since valuation a number of compression is anticipated to barely offset the anticipated earnings-per-share progress and the dividend.
Ultimate Ideas
A.O. Smith is an industry-leading firm. It has the highest model in its class, with compelling future progress potential. It has such a dominant market share of its {industry} that the corporate can proceed to beat short-term difficulties. Over the long run, we consider the potential progress alternatives in rising markets are extremely enticing.
Whereas the dividend yield is on the low facet, the corporate’s dividend progress tempo and observe file is spectacular.
Nonetheless, the inventory valuation stays barely elevated. In consequence, we view the inventory as comparatively unattractive to buy. In consequence, we charge AOS inventory a maintain for now.
Moreover, the next Positive Dividend databases include essentially the most dependable dividend growers in our funding universe:
In the event you’re searching for shares with distinctive dividend traits, take into account the next Positive Dividend databases:
The key home inventory market indices are one other stable useful resource for locating funding concepts. Positive Dividend compiles the next inventory market databases and updates them month-to-month:
Thanks for studying this text. Please ship any suggestions, corrections, or inquiries to help@suredividend.com.
