C.H. Robinson Worldwide, Inc. (CHRW): Quality Dividend Growth At A Reasonable Price 

C.H. Robinson (CHRW) has raised its dividend for 18 consecutive years and rewarded shareholders with double-digit annual dividend growth over the last decade.

The company’s dividend scores strong marks for safety and growth, and its business model generates excellent free cash flow in practically every economic environment.

With large and fragmented markets and numerous competitive advantages, C.H. Robinson has potential to deliver double-digit earnings per share growth going forward.

Let’s take a closer look at the business to determine if it could be an attractive dividend growth investment today.

C.H. Robinson

Business Overview

C.H. Robinson is one of the largest third-party logistics companies in the world and has been in business for more than 110 years.

The business essentially acts as a middleman in the transportation industry, helping connect companies that need to ship goods with cost-effective transportation providers that have capacity available via trucks, railroads, airlines, and ships.

C.H. Robinson doesn’t own hard transportation assets such as trucks and is instead a service company that utilizes people and technology to create transportation and supply chain advantages for its customers.

The company has over 110,000 customers and maintains relationships with over 68,000 carriers and suppliers, who it purchases shipping capacity from on behalf of its customers. C.H. Robinson’s services essentially help clients lower their costs, improve efficiency, and reduce risk.

Truckload (56% of year-to-date 2016 sales) and less-than-truckload (17%) services account for 73% of revenue. The rest of the company’s transportation segment consists of ocean (10%), air (3%), customs (2%), intermodal (2%), and other logistics (4%) services.

C.H. Robinson also has a small sourcing business (6%) that sources perishables for grocers and restaurants.

By end market, 25% of revenue is from manufacturing, 20% food & beverage, 15% chemical, 14% retail, 11% automotive, 7% paper, 5% electronics, and 3% other.

The company’s top 25 customers account for just 12% of total sales, underscoring its diversification.

Approximately 15% of C.H. Robinson’s net income is generated from operations outside of the U.S., and the business is investing to become more global.

Business Analysis

Many of C.H. Robinson’s advantages come from its scale – the company generates more revenue than top rivals Landstar and XPO Logistics combined.

If you were a retailer that needed to cost-effectively ship goods across the country, you would want to use a broker that had access to the greatest number of shipping routes and carriers.

If you were a transportation company, you would want to work with a broker that had access to the greatest number of potential customers in need of your shipping services.

With access to more than one million pieces of equipment, C.H. Robinson boasts the largest contracted pool of motor capacity in North America.

The company has relationships with nearly 70,000 carriers, which provides its shipping customers with supply chain flexibility. In fact, C.H. Robinson delivers an average of three services per top 500 customer.

Connecting a global supply chain with hundreds of thousands of participants and even more variables is very difficult, but C.H. Robinson has the necessary relationships, technology, and employees to get the job done efficiently for customers.

As C.H. Robinson continues adding more shipping customers and transportation companies, its competitive advantages strengthen.

As seen below, the company has expanded its number of transportation company relationships from 40,000 in 2005 to 68,000 at the end of 2015.

C.H. Robinson (CHRW)

Source: Simply Safe Dividends, CHRW Annual Reports

Likewise, its base of shipping customers has more than doubled. This gives C.H. Robinson considerable purchasing power when dealing with transportation companies and helps its smaller shipping customers gain access to more affordable rates compared to what they could achieve going it alone.

C.H. Robinson (CHRW)

Source: Simply Safe Dividends, CHRW Annual Reports

As a result, C.H. Robinson has enjoyed steady growth in shipments, which nearly quadrupled from 4.4 million in 2005 to 16.9 million in 2015.

C.H. Robinson (CHRW)

Source: Simply Safe Dividends, CHRW Annual Reports

C.H. Robinson’s vast network of offices has also helped it build valuable customer and carrier relationships over the course of decades. Close to 50% of its truckload shipments are shared transactions between offices, underscoring their importance and once again putting smaller rivals at a disadvantage.

As C.H. Robinson’s network and number of services offered continue to grow, it should be able to take more market share of its large and highly fragmented industries.

According a recent company presentation, C.H. Robinson has less than 3% market share across its key areas of business in North America.

The company’s revenue has doubled over the past decade, and continued gains should be possible as C.H. Robinson uses its scale, breadth of supply chain services, extensive network, and technological investments to consolidate the market in the coming years.

C.H. Robinson (CHRW)

Source: C.H. Robinson Investor Presentation

Besides market share gains, several secular changes should serve as tailwinds. Supply chains are increasingly global and complex. It makes less and less sense to keep these operations in-house if you are a business that ships goods.

Freight volumes should continue to climb, especially as online shopping grows and businesses outsource more of these complicated supply chain activities.

Real-time tracking data and just-in-time inventory are must-haves in today’s world as well, increasing the importance of robust technology systems.

For example, C.H. Robinson had nearly 20 million web and mobile interactions with customers and carriers during the last quarter alone – up 30% from the beginning of 2016.

Smaller service providers may be unable to keep up with customers’ demands for use of comprehensive, streamlined technology platforms.

C.H. Robinson launched Navisphere, its global transportation management system, in 2012. Its platform connects 150,000 customers, carriers, and suppliers by the method of their choice – electronic B2B, web, mobile, and person-to-person.

The company’s programs automate more than 70% of all customer interactions and encompass the entire lifecycle of a shipment from notification through the delivery and financial settlement. This allows customers to have full visibility to all shipments and creates moderate switching costs over time.

I believe the increasing importance of global transportation management systems and global trade will further pressure the industry to consolidate with larger players such as C.H. Robinson benefiting the most.

At the end of the day, I view C.H. Robinson as a simple, time-tested business with numerous opportunities for continued earnings growth.

The industry is very competitive with relatively low barriers to entry (hence its fragmentation), but C.H. Robinson’s size, technology platform, breadth of services, and excellent financial health provide support for continued growth.

Few companies can match the company’s scalable, reliable, and cost-effective service.

All things considered, the company believes it can grow revenue and diluted earnings per share by 5-10% and 7-12% per year, respectively.

While this marks a slight deceleration from growth enjoyed over the last decade (9.9% and 11.8% per year for revenue and earnings, respectively), it would certainly make me a happy shareholder if achieved.

C.H. Robinson (CHRW)

Source: C.H. Robinson Investor Presentation

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