No matter how high or low a company's dividend is at any given moment, there is no way for an investor can say that a dividend is a complete certainty. There are simply too many variables -- some that may be out of the company's control -- that could cause a management team to cut or even eliminate its dividend entirely.
That said, there are some stocks where the chances of a dividend cut are incredibly low. Uniform rental company Cintas is very much in that category. Not only has it maintained its status as a Dividend Aristocrat for more than a decade, but the company's business model and financials also suggest that investors have little to fear when it comes to Cintas' dividend. Here's a look at what Cintas does and why there is little fear of investors losing its dividend anytime soon.
Image source: Cintas.
Cintas' business model
Cintas has been one of the best wealth-building stocks over the long term. It has been able to maintain annual dividend increases for 34 consecutive years, which gives the stock Dividend Aristocrat status. Over the past decade, it has increased its payout at a compounded annual rate of 15%. Cintas' dividend growth, coupled with share repurchases, has produced a total return of 448% over the past decade that has easily outpaced the S&P 500's total return of 117% in that same time frame.
There isn't anything glamorous about Cintas' business. According to its 10-K, the company defines its business activities as "providing a wide range of products and services...including uniforms, floor care, restroom supplies, first aid and safety products, fire extinguishers and testing, and safety and compliance training." These are the types of must-have or must-do elements of a business that companies rarely want to do themselves. It doesn't make a lot of financial sense for a manufacturing company to spend time and resources on industrial laundry services on-site, so they contract stuff like this out to service providers such as Cintas.
Luckily for Cintas, there are thousands upon thousands of companies in this position, and it gives the company an incredibly diverse customer base that is going to use Cintas' services on a regular basis. Cintas estimates that it serves over 1 million businesses worldwide, and not a single customer makes up 1% of revenue. Having such an expansive customer base means that its results aren't going to be impacted from losing any one customer at a time, which ensures a certain level of certainty when it comes to revenue.
Uniforms and many of the other services that Cintas provides are very much commoditized businesses, which means that scale matters in this industry. Cintas is the biggest fish in the uniform rental business by a long shot. After the recent acquisition of G&K Services, Cintas has more than 30% of the uniform rental market, with the next closest competitor -- Aramark -- at only 10%. Larger market share means more efficient delivery routes and better utilization of distribution and services centers. As a result, the company can deliver a service at lower cost than many of its peers and command higher margins.
| Company | LTM Gross Margin | LTM EBITDA Margin | LTM Net Profit Margin |
|---|---|---|---|
| Cintas (CTAS 0.67%) | 44.9% | 18.4% | 9.9% |
| Aramark (ARMK -0.19%) | 37.5% | 12.5% | 4.4% |
| UniFirst (UNF -0.98%) | 11.1% | 9% | 2.5% |
Data source: YCharts. EBITDA = earnings before interest, taxes, depreciation, and amortization. LTM = last 12 months.
A business with a larger competitive moat like Cintas' is one that could easily fall victim to its own success as management rests on its laurels or makes ill-suited acquisitions. Luckily, this hasn't been an issue for Cintas. Not only has management been able to grow the business organically -- organic revenue that didn't include the G&K acquisition was up 8% in the fiscal year 2017 -- but it has also been able to make acquisitions that haven't eroded rates of return.
Financial firepower
The most considerable risk to Cintas' business is that its success is largely tied to overall economic health in North America. That hasn't been too much of a concern recently, as the U.S. has posted positive job growth for 86 consecutive months. However, when the next economic pullback comes -- they always do -- chances are Cintas' revenue and margins will likely suffer.
Since we're looking at the sustainability of the dividend, what matters is whether or not the company's income statement can take a hit without compromising its dividend payment. If that 34-year streak wasn't convincing enough for you, let's dig into the company's current financials.
Image source: Cintas.
A straightforward number we can use to gauge the health of Cintas' dividend is its payout ratio. As it stands today, Cintas has a payout ratio of 25.4%. This means that it is paying out a quarter of its profits in the form of a dividend. At this level, it could easily raise its dividend payment without compromising its ability to invest in the business or weather an economic downturn.
While payout ratio is an OK measure of dividend sustainability, it is by no means perfect. There is a lot of wiggle room in an income statement that can make earnings look better than they are, and earnings aren't a measure of the amount of cash generated or spent. So another way to look at dividend sustainability is to look at the cash payout ratio. For the fiscal year 2017, Cintas generated $525 million in free cash flow before accounting for the one-time acquisition of G&K. The company paid a total of $142 million in dividends, which means its cash payout ratio was 26.9%. This low ratio is also promising because it gives management cash to pay down debt, make more acquisitions down the road, juice per-share returns by repurchasing stock, or maintain dividend payments through another economic downturn.
What a Fool believes
Dividends are never guaranteed, but some companies you can be almost certain that they will be able to keep growing their dividend over the long term. Cintas is one of those stocks that looks like it will be able to maintain its Dividend Aristocrat status for a long time. It has a considerable economic moat around its business that keeps the competition at bay, management has been able to generate high rates of return and loads of free cash flow to support its shareholder-friendly initiatives, and there is a considerable margin of safety in its financial statements to withstand an economic downturn.
Cintas' dividend yield of 1% is never going to wow anyone. Over the company's history as a publicly traded stock, the only time its dividend yield was more than 2% was during the Great Recession. Over the long haul, though, Cintas' dividend has been incredibly reliable and looks like it will continue to be that way for a long time.
