Income investors seek a steady stream of dividends. Cintas’s dividend history is long and it might make a great addition to an income portfolio. Let’s take a look at the business, dividend history, and payout safety going forward.
Business Overview and Highlights
Cintas operates within the consumer sector and maintains a solid credit rating (A-) from the S&P. This allows Cintas to issue cheap debt to expand operations and finance other initiatives.
Cintas (CTAS) has certainly been expanding. The $21 billion business services company based out of Cincinnati, OH is considered by many to be a momentum stock. Cintas shares are up 13.52% over the last year, and 3.51% over the last quarter. Fortunately for dividend investors, Cintas’ increase in market value has correlated to dividend growth. And the growth has been substantial.
On October 30, 2018 the company’s board of directors announced a $2.05 per share annual dividend. That is a 26.5% increase over last year’s dividend. It represents the 35th consecutive year that Cintas has increased their annual dividend making them a Dividend Aristocrat.
10-Year Dividend History
The company paid investors $0.47 per share a decade ago. Over the last 10 years, the dividend has climbed to $1.62. That’s a 245% increase and you can see the annual changes below…
The compound annual growth is 13.2% over 10 years, and over the last year, the dividend climbed 21.8%. The increase in dividend growth is a good sign. As you can see, Cintas’ board of directors approved a special dividend in 2015. Thanks to a successful merger, the company added a $0.85 per share special dividend on top of the $0.85 per share annual dividend. Investors of record that year enjoyed an annual dividend payment of $1.70 per share. Cintas might work out as a great income investment. Let’s take a look at the yield…
Current Yield vs. 10-Year Average
Cintas’s long history of paying dividends makes it one of the best dividend stocks around. This also makes the dividend yield a great indicator of value. A higher yield is generally better for buyers. Sustainability is also vital, and we’ll look at that soon.
The dividend yield comes in at 1% and that’s below the 10-year average of 1.44%. The chart below shows the dividend yield over the last 10 years…
The lower yield shows that investors have bid up the company’s market value. They might be expecting higher growth and payouts. But more often than not, the dividend yield is mean reverting with share price changes.
Improved Dividend Safety Check
Many investors look at the payout ratio to determine dividend safety. They look at the dividend per share divided by the net income per share. So, a payout ratio of 60% would mean that for every $1 Cintas earns, it pays investors $0.60.
The payout ratio is a good indicator of dividend safety, but accountants can manipulate net income. They adjust for goodwill and other non-cash items. A better metric is free cash flow.
Here’s Cintas payout ratio based on free cash flow over the last 10 years…
The ratio is volatile over the last 10 years and the trend is up. The 2016 spike is a result of Cintas having its lowest free cash flow numbers in years at 190 million. Fortunately, their free cash flow returned to a comfortable 490 million in 2017, and 692 million in 2018. The last reported year shows a payout ratio of 24.9%. This gives plenty of wiggle room for Cintas’s board of directors to raise the dividend.
Good investing,
Robert
