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Dividend Aristocrats in Focus Part 11: Ecolab Inc. (ECL)

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Ecolab (ECL) is the largest publicly traded company in the cleaning products industry. Ecolab’s vision is guided by four key principles, which are:

  1. Clean water
  2. Safe food
  3. Abundant energy
  4. Healthy environments

Abiding by these core principles has built very successful relationships with its customers.

Ecolab traces its beginnings to 1923, when Merritt J. Osborn invented a new cleaning product called Absorbit. This product was revolutionary for its time. It cleaned carpets without the need for hotels to shut down to perform carpet cleaning. The product held so much promise that Osborn built an entire company around it. He called the company Economics Laboratory.

Over time, the company developed a wide range of other products and also entered cleaning services. Today, Ecolab generates annual sales in excess of $13 billion and employs 47,000 associates.  The company has increased its dividend payments every year since 1985.

Ecolab’s long dividend history makes it a member of the exclusive Dividend Aristocrats Index.  To be a Dividend Aristocrat, a stock must have at least 25 consecutive years of dividend increases.  Dividend Aristocrats tend to be the ‘best of the best’ in their industry.  You can see all 50 Dividend Aristocrats here.


Ecolab has done more than just increase dividends over the last decade…  It has also delivered strong total returns, as the image below shows.

Keep reading this article to learn more about the investment prospects of Ecolab.

Ecolab – Business Overview

Ecolab operates three major business segments:

  • Global Industrial
  • Global Institutional
  • Global Energ

Each business is roughly of equal size. The Global Industrial group provides water treatment, cleaning, and sanitation products and services, primarily to large industrial firms. These customers are typically within the food and beverage, manufacturing, chemical, and mining industries.

The Global Institutional business provides specialized cleaning and sanitation products to the foodservice, hospitality, lodging, healthcare, and retail industries. Ecolab’s products are used for on premise laundry, housekeeping, and general food safety purposes.

The Global Energy segment is centered on the Nalco brand. This division provides chemical and water treatment services to the petroleum and petrochemical industries. Ecolab’s Global Energy business is split into upstream oilfield services and downstream refining services.

The company is also diversified geographically. Approximately 43% of its annual sales come from outside North America.

Ecolab Inc. (ECL)
Source: 2015 Annual Report, page 2

Growth Prospects

Ecolab should also enjoy growth in new markets. It has meaningfully expanded its international presence in recent years, particularly when it comes to emerging markets.

Nations like China and India that are poised for higher economic growth rates than mature markets like the U.S. Approximately 25% of Ecolab’s annual revenue comes from Asia, Latin America, the Middle East, and Africa.

In addition, Ecolab pursues growth through bolt-on acquisitions. Last year alone, the company made five separate acquisitions, which collectively added $300 million in annual revenue.

These strategies have fueled significant growth over the long term. Ecolab has increased its earnings-per-share by 13.5% per year over the past decade. With its strong earnings growth, it has rewarded shareholders with compelling dividend growth of 14.4% a year over the same time period.

Ecolab’s growth has slowed to start 2016. Last quarter, earnings-per-share held flat from the same quarter last year. However, the company experienced a seven-point headwind to earnings growth due to foreign exchange. As a global company, Ecolab is exposed to heightened currency risk. But its organic growth indicates demand for Ecolab’s products and services remain strong.

If the rally in the U.S. dollar eases going forward, it will be a significant growth catalyst for Ecolab.

In addition, the company will generate earnings growth from share repurchases. A benefit of having such a highly profitable business model is that it leaves plenty of cash flow to buy back stock. Ecolab repurchased 2.3 million shares of its own stock last quarter alone.

Competitive Advantages & Recession Performance

Ecolab’s competitive advantage comes from a mix of its industry leading size, trusted brands, and innovative research and development division.

Ecolab’s 2015 annual report said the following about how the company’s effective R&D investing brings considerable growth:

“In 2015, we delivered another record innovation pipeline, the largest in company history. We introduced more new products than ever before, and delivered breakthrough solutions in every Ecolab division and across every region. We forecast the 2015 innovation pipeline to deliver more than $1 billion in new revenue in five years.”

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.

These competitive advantages have helped insulate Ecolab from economic downturns. It sailed through the Great Recession. The company continued to grow earnings at a rapid pace through the financial crisis.

  • 2006 earnings-per-share of $1.43
  • 2007 earnings-per-share of $1.66
  • 2008 earnings-per-share of $1.86
  • 2009 earnings-per-share of $1.99
  • 2010 earnings-per-share of $2.23

Very few businesses reported earnings-per-share growth every year through the Great Recession.  This makes Ecolab one of the most recession resistant Dividend Aristocrats.

Valuation & Expected Total Returns

Ecolab stock trades for a forward price-to-earnings ratio of 23.3. By comparison, the S&P 500 trades for a forward price-to-earnings ratio of 18.1.

Since 2000, Ecolab has an average price-to-earnings ratio of 26.  The company is trading about in line with its historical valuation levels at current prices.  Ecolab has historically traded for higher multiples because of its safety and better growth prospects.

Ecolab currently pays an annualized dividend of $1.40 per share, which comes out to a 1.2% dividend yield. This is below the 2% average dividend yield in the S&P 500.

Ecolab makes up for its below-average dividend yield with strong dividend growth each year. Over the past five years, Ecolab has doubled its quarterly dividend—a 15% compound annual dividend growth rate in that time.

There may not be much room for multiple expansion, but Ecolab’s high earnings growth rate should fuel strong returns for shareholders. The dividend yield is a nice added kicker to future returns.

Going forward, investors can still reasonably expect low double-digit total returns on a compound annual basis, before changes in the valuation multiple level.

Final Thoughts

Ecolab is a high-quality company with a strong business model and a leadership position in its industry. It rewards shareholders with consistent earnings-per-share growth, which fuels its impressive dividend growth. The company has paid uninterrupted dividends for 79 years in a row.

The disadvantage of owning Ecolab stock is its low current dividend yield; this may make the stock somewhat undesirable for investors who desire current income. But Ecolab is a compelling hold for dividend growth investors looking for above-average total returns over longer time periods.

The company ranks in the top 1/3 of stocks in the Sure Dividend database using The 8 Rules of Dividend Investing.  Ecolab ranks well because of its double-digit earnings-per-share growth rate and lower payout ratio which typically hovers around 30%.  Lower payout ratios make dividend cuts less likely – and they give a company room to grow dividends faster than earnings-per-share going forward.

Article by Bob Ciura


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