Dividend Aristocrats Part 38: Ecolab Inc. (ECL) by Ben Reynolds, Sure Dividend
Ecolab (ECL) is the largest publicly traded company in the cleaning products industry. The company currently has a market cap of $34 billion.
The company is an industry leader in the ‘boring’ cleaning/safety industry. Ecolab is in the business of providing safe food, clean water and energy, and a healthy environment through its various products and services.
Ecolab may not be a household name company, but it does have very sizeable operations:
- 47,000 employees
- $13.8 billion in annual revenues
- Servicing customers in over 170 countries
- Servicing customers in over 1.3 million locations
Ecolab’s Dividend History
The company has increased its dividend payments every year since 1985, giving it a streak of 30 consecutive years of dividend increases. The company’s long dividend streak makes Ecolab a Dividend Aristocrat.
Ecolab’s dividend history is shown below:
The company has not reduced its dividends since at least 1978, and has paid dividends for 79 consecutive years. Few businesses can match the consistency and longevity of Ecolab.
Ecolab’s most recent dividend increase was on December 3rd; the company raised dividend payments by 6%.
Unfortunately for investors seeking current income, Ecolab has a low dividend yield of just 1.2% due to its conservative payout ratio of 34.8%.
Business Unit Overview of Ecolab
Ecolab’s business is divided into four primary segments.
Each segment’s percentage of total operating income generated for Ecolab through the first 9 months of the company’s fiscal 2015 is shown below to give an idea of the importance of each segment:
- Global Industrial generates 28% of total operating income
- Global Institutional generates 38% of total operating income
- Global Energy generates 29% of total operating income
- Other generates 5% of total operating income
The Global Industrial segment operates under 4 divisions:
- Global Water
- Global Food & Beverage
- Global Paper
- Global Textile Care.
The Global Water division provides water treatment programs and products under the Nalco name. The Global Food & Beverage Division provides cleaning and health products and services to breweries, soft-drink bottlers, the dairy industry, and the meat and poultry industry. The Global Paper division provides water and process applications to the pulp and paper industry. The Global Textile Care division provides washing solutions for the uniform rental, hospitality, and health care industries.
The Global Institutional segment is Ecolab’s largest based on operating income. The segment breaks its operations into 3 divisions:
- Global Institutional
- Global Specialty
- Global Healthcare
The Global Institutional division (within the Global Institutional segment) provides equipment and cleaning products for warewashing (restaurant scale dish washing), laundry, food-safety, and housekeeping. The Global Specialty segment provides restaurants with cleaning products under the Kay name. The Global Healthcare division provides cleaning and infection prevention solutions to the healthcare industry.
The Global Energy segment operates under the Nalco Champion name. The segment’s operations are divided into an upstream and downstream division. Both divisions serve the chemical and water treatment needs of the petroleum and petrochemical industries.
The Other segment is Ecolab’s smallest by far. The segment is responsible for just 5% of total operating income. The Other segment provides pest elimination as well as kitchen repair operating services.
Competitive Advantage
Ecolab’s long history of growth and rising dividends is evidence of a strong and durable competitive advantage.
The company’s competitive advantage comes from a mix of its industry leading size, trusted brands, and innovative research and development division.
The company’s 2014 annual report said the following about the company’s value-driving research and development team:
“Ecolab’s commitment to innovation fuels our long-term growth and results in a broad range of solutions that meet our customers’ operational and sustainability challenges. With 19 innovation and technical support facilities, 1,600 Research, Development and Engineering (RD&E) associates throughout the world and more than 6,700 patents, we develop high-performing solutions and technologies that provide value to our customers.”
The company’s larger size allows it to outspend its competitors in research and development which drives further innovation and an even greater research budget.
Ecolab’s Better-Than-Expected Growth
Ecolab’s growth over the last year has been higher than what one would normally expect from a well-established business:
- Revenue-per-share growth of 10.1% a year
- Earnings-per-share growth of 13.3% a year
- Dividends-per-share growth of 14.7% a year
Ecolab is experiencing short-term headwinds from the strong United States dollar and declining oil prices. Ecolab’s global operations mean that a strong dollar negatively impacts earnings. Low oil prices hurt the company’s Global Energy segment.
Despite these short-term setbacks, Ecolab is still expected to grow earnings-per-share by 4% to 6% in fiscal 2015.
The company’s long-term growth prospects remain bright. Demand for cleaning and safety industries will remain strong. Continued growth in emerging markets combined with more government regulations are the long-term growth drivers for Ecolab.
I expect Ecolab to continue compounding earnings-per-share at 9.0% to 13.0% a year over the next several years. Growth could be slower if oil prices continue to fall and the dollar continues to strengthen.
Valuation – Is Now The Time to Buy?
Ecolab is a shareholder friendly with favorable growth prospects. As one would expect, it trades at a premium price-to-earnings ratio.
Ecolab currently trades at a price-to-earnings ratio of about 26.4. For comparison, the S&P 500 is trading for at a price-to-earnings ratio of 21.7.
It’s true that Ecolab has an above-average price-to-earnings ratio. The company has traded for a steep premium to the S&P 500 for much of the last decade. Ecolab is shareholder friendly and has excellent long-term growth prospects. As a result, I believe the company to be trading around fair value at this time.
Recession Performance
Ecolab’s services are vital to the businesses it serves. As a result, the company grew earnings-per-share each year throughout the Great Recession of 2007 to 2009.
The company’s earnings-per-share through the Great Recession of 2007 to 2009 are shown below to detail its success:
- 2007 earnings-per-share of $1.66
- 2008 earnings-per-share of $1.86
- 2009 earnings-per-share of $1.99
Final Thoughts
Ecolab is a recession resistant stock with a long dividend history and excellent growth prospects. The company’s low dividend yield and above average price-to-earnings ratio prevent it from ranking especially high using The 8 Rules of Dividend Investing.
Despite recent headwinds (strong dollar, low oil prices), Ecolab’s stock price has not gone on sale. Ecolab is a long-term hold for investors looking for a stable dividend growth stock in a slow changing industry. The stock’s low yield makes it a poor choice for investors in need of current income. Now is not the time to initiate a new position in this great business.
