Uniform Dividend Growth

By Chad Henage - July 10, 2012 | Tickers: CTAS, TGT, VFC, WMT | 0 Comments

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When you have trouble coming up with direct competitors for a company, usually that's a good thing. If this same company is also a dividend aristocrat, you would expect a sure winner. The company in question is Cintas Corporation (NASDAQ: CTAS). Cintas specializes in retail uniforms, first aid, as well as mats and mops for businesses. The reason I had trouble coming up with public competitors, is most are private companies. However, what I realized is, in theory any company producing fairly priced clothing is a direct competitor.

Cintas might product uniforms for retail, but companies could buy these pants, shirts, and hats anywhere. If you're a business owner, and you want your employees to all dress the same, you have more than just a few choices. You can contract through Cintas and get your uniforms, first aid supplies, and corporate logo mats, through Cintas for everything. Your second option is to buy discounted pants, shirts, hats, and other clothing at retail from a cheaper brand. If this is your choice, you have multiple choices. V.F. Corporation (NYSE: VFC) has multiple brands that could supply your needs like North Face, JanSport, Wrangler, and Lee. If you wanted to deal with one retailer, you could buy from the Cherokee line of clothing that is licensed to Target (NYSE: TGT). You could also buy from either the White Stag line of women's clothing, or the George line of formal clothing from Wal-Mart (NYSE: WMT). You can see that Cintas actually competes with many of the largest and most established retailers in the world. With this in mind, let's see how the stock market values Cintas versus these other three:

Of the four companies, Cintas has the highest P/E ratio, but only the second highest future growth rate. While the company's dividend streak is impressive, all three of the company's competitors have a great history of raising their dividend as well. When it comes to free cash flow generation, V.F. Corporation leads the pack. Cintas is selling for a bit of a premium compared to its competition, but let's see if this is due to the company's dividend growth record.

Before we examine how the company has increased their dividend, we need to know if the company can afford their current payout. In the last three years, at first it looks like the company's operating cash flow has gone down, while dividends have increased. However, much of this change in operating cash flow has to do with changes in line items on the balance sheet rather than real cash costs. It's important to understand that line item changes don't define what's really happening to the company's cash. This is the difference between calculating a 45% free cash flow payout ratio for 2011, and realizing that the actual payout ratio is much lower. Knowing the company can afford their current payout, allows us to move onto dividend growth.

In the last several years, Cintas' dividend growth seems inconsistent:

In the first five years of the chart, the company increased their dividend on average by 9.75%. In the most recent five years, the average rate of increase has been 9.24%. What's interesting is, among the many peaks and valleys in the last five years, the company's dividend growth has been nearly identical over the last ten years combined. So what should investors expect in the future? 

Analysts expect earnings growth of just less than 13%. In the last few years, if you strip away changes in line items like receivables, inventories and other things, the company has seen real cash flow stay relatively flat, while net income increased. If this trend continues in the future, I would expect dividend increases in the 10-12% range. This would allow the company to continue its string of dividend increases, while maintaining a healthy free cash flow payout ratio. If you like Cintas' business, the stock looks like a decent deal. The only problem I have is, I like V.F. Corporation better. Both are dividend aristocrats, and V.F. Corp. shareholders can probably expect 13-15% dividend growth based on my research on the company. The fact that V.F. Corp. sells for a lower P/E ratio, has a higher growth rate, and better dividend, are all points for buying V.F. Corp. instead. When you add in the fact that V.F. Corp. generates more than twice the free cash flow of Cintas, the trade-off seems too good to pass up.

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