Water, hygiene, and energy technology company Ecolab (NYSE:ECL) has easily beaten the returns of the S&P 500 in the last decade. The scoreboard shows total returns of 254% and 108%, respectively. The number of companies that have dusted the index by 146% in that span is relatively small.
As the chart above shows, the dividend has played a significant role in Ecolab's stellar returns in the last decade. And, in fact, the company has paid a steadily increasing dividend to shareholders for 80 consecutive years -- another feat few companies can boast. While it's easy to say that dividend payments are safe based on that track record alone, investors may find more comfort by digging into the numbers.
By the numbers
Despite stagnant revenue growth in recent years, Ecolab has managed to grow earnings and operating cash flow. Consider that revenue slipped 0.8% from 2013 to 2016, but operating cash flow and net income grew 24% and 27%, respectively. And thanks to a reduction in the number of shares outstanding, earnings per share actually grew 31% during the three-year span.
The top line has struggled mostly due to subdued demand and pricing for oil and gas offerings. While that's largely out of the company's control, management has done an excellent job of reinforcing operational efficiency throughout the Ecolab universe to boost margins and earnings. Acquisitions and investments in higher-value businesses such as pharmaceutical drug production and food manufacturing have also lifted the bottom line.
The strategy has had a tremendous effect on cash flow from operations, too.
The result? The total amount of cash devoted to annual dividend payments is on pace to more than double in 2017 compared to 2013. The trend has, importantly, been supported by growing earnings.
Consider that Ecolab boasts a payout ratio, or the percentage of earnings distributed as a dividend, of just 33%. It hasn't exceeded 44% at any point in the last decade, which demonstrates that the dividend is remarkably sustainable.
The only thing that could jeopardize dividend payments would be a catastrophic collapse of Ecolab's earnings. That seems unlikely considering the cash cow generates income across a diverse portfolio that spans energy, pulp and paper manufacturing, healthcare, drug manufacturing, food production, and more. Weakness in one industry would be unlikely to affect another -- an argument supported by the fact that the company managed to grow its dividend during the Great Recession.
Things may be a little different during the next market downturn, however, even if it doesn't come close to matching the depths of the Great Recession. That's because the company's debt-to-assets ratio has ballooned since the 2011 acquisition of Nalco.
While management has maintained a healthy balance sheet that is far from threatening the dividend, it wouldn't be surprising if Ecolab suspended its share repurchase program to prioritize debt payments during the next recession. But even then, the dividend would remain safe. After all, more cash flow is currently devoted to share repurchases than dividends, making it likely more than enough cash will be available to sustain dividends and cash payments in the worst of markets.
What does it mean for investors?
Ecolab is hands down a blue-chip dividend stock and a solid investment for any portfolio. It has diverse businesses, steadily improving earnings and margins, and could rebound sharply should its energy segment recover in a more robust manner.
That process may just be getting underway: In the second quarter of 2017, the energy segment posted year-over-year growth for the first time in years. As recent performance demonstrates, the company is well positioned for creating long-term shareholder value with or without it. Long story short, Ecolab's dividend is remarkably safe.