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Dividend Aristocrats Part 37: Cintas Corporation (CTAS)

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Dividend Aristocrats Part 37: Cintas Corporation (CTAS) by Ben Reynolds, Sure Dividend

Cintas (CTAS) primary business is creating and servicing corporate uniform plans.

The company also sells business products and services, including:

  • Safety services
  • first aid products
  • Restroom supplies
  • Document management
  • Fire protection products

CTAS was founded in 1929 as Acme Industrial Laundry Company. Cintas went public in 1983 and now has a market cap of $9.6 billion.

CTAS  has a streak of 31 consecutive years of dividend increases.  The company’s long dividend streak makes Cintas a member of the exclusive Dividend Aristocrats Index.

Cintas Corporation (CTAS)

Cintas Business Overview

Cintas’ operations are divided into 3 segments.  Each segment is shown below, along with the percentage of total pretax income generated from each segment:

  • Uniform Rental & Facility Services generates 87% of pretax income
  • First Aid & Safety Services generates 6% of pretax income
  • All Other generates 7% of pretax income

Cintas generates the vast majority of its income from its rental uniform business. This business line is the core of what Cintas is.

Competitive Advantage

Cintas competitive advantage comes from its established local delivery routes and network of processing facilities. The company’s employee and location count are shown below:

  • 8,000 delivery routes
  • 364 operating facilities
  • 8 distribution centers
  • 32,000 employees (only 200 union employees)

It would require a large amount of up-front capital to compete effectively with Cintas in business uniform services in North America. Cintas is the largest business of its kind in North America.

The company has a scale based competitive advantage that is very difficult for potential competitors to replicate.

Growth Prospects & Total Return

Cintas has grown earnings-per-share at 6.6% a year over the last decade.

The company has reduced its share count by 4.1% a year over the same time period. About two-thirds of Cintas’ growth has been driven by share repurchases rather than organic growth.

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 United States.  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.

Shareholders should expect total returns of 6.2% to 8.2% a year going forward from Cintas. Total returns will come from:

  • Share repurchases of 3% to 4% a year
  • Organic growth of 2% to 3% a year
  • Dividend yield of 1.2%

Dividend Analysis

Cintas currently has a dividend yield of just 1.2%.  The company has a low payout ratio of around 37%.

Cintas’ dividend payments are in no danger of being cut due to the company’s low payout ratio and consistent growth.

The company’s low yield and payout ratio are somewhat misleading, as management rewards shareholders with strong share repurchases rather than dividends.

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.  The company has grown its dividend payments at around 10% a year over the last decade, and recently hiked its dividend by 23.5%.

Despite solid dividend growth, the company’s low yield makes it unappealing for investors seeking current income. Additionally, the company only pays dividends once per year, meaning investors seeking more regular dividend income should look elsewhere.

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 downturns in its earnings-per-share in 2009 at the peak of the Great Recession.

The company’s earnings-per-share for 2007 through 2012 are shown below to give you an idea of how long it took the company to recover to new earnings-per-share highs after the Great Recession:

  • 2007 earnings-per-share of $2.09 (new high)
  • 2008 earnings-per-share of $2.15 (new high)
  • 2009 earnings-per-share of $1.83 (recession decline)
  • 2010 earnings-per-share of $1.49 (recession low)
  • 2011 earnings-per-share of $1.68 (partial recovery)
  • 2012 earnings-per-share of $2.27 (full recover, new high)

Cintas’ recovery was delayed as businesses were hesitant to hire new employees until well after the Great Recession ended.

Share repurchases helped boost earnings-per-share.  On a net income basis (not including share repurchases), Cintas did not hit new highs from 2009 earnings lows until 2013.  The company does grow over the long run, but it is susceptible to economic downturns which delay growth.

Cintas’ Valuation

CTAS has historically traded for a price-to-earnings multiple in-line with the S&P 500.

  • S&P 500 currently has a price-to-earnings ratio of 21.3
  • Cintas currently has a price-to-earnings ratio of 25.9

CTAS  is currently trading at a 1.2x premium to the S&P 500. The company’s long term expected total return is around what one would expect from the S&P 500 (if not a bit below it).

If the S&P 500 were to fall to its historical average price-to-earnings ratio of 15.6, Cintas would look very overvalued at current prices. Even in today’s ‘premium value’ market (due to low interest rates), Cintas appears to be overvalued.

Final Thoughts

Cintas has a durable competitive advantage and operates in a slow changing industry that will likely continue far into the future. It’s difficult to fathom the need for laundering services to somehow go away.

It is hard to imagine a world where employees no longer need to wear uniforms; as a result, Cintas will likely continue to grow for many years to come.

The company’s low yield make it a poor choice for investors seeking current income.  Additionally, Cintas is likely overvalued at current prices.  The company ranks in the bottom 50% of stocks with 25+ years of dividend payments without a reduction using The 8 Rules of Dividend Investing.

Potential investors in this stable business should wait until the company’s price-to-earnings ratio falls in line (or below) the S&P 500’s price-to-earnings ratio before initiating a position in Cintas.

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