I'm not sure if "boring stocks" are ever going to make it as an asset class of their own, but it serves as a useful epithet to describe factors that certain stocks have in common. Stocks like cleaning and household products company Clorox (CLX 1.24%), corporate apparel company Cintas (CTAS -0.33%), and heating, ventilation, air conditioning, and refrigeration (HVACR) distributor Watsco (WSO 6.54%) are easy-to-understand businesses that quietly operate within their own niches while paying dividends to investors. If that's the kind of stress-free ride that you want as an investor, then these stocks might be for you.
Watsco: The air conditioning specialist
Watsco's business model is simple. In fact, it's so simple it's explained away in one slide in its investor presentations. An HVACR unit breaks down, a Watsco contractor is called in to fix it, and the contractor duly sources a part or a new unit in order to fix the problem. That's how Watsco makes money.
Boring stocks give you a relaxed life. Image source: Getty Images.
HVACR servicing is a relatively stable end market with 65% to 70% of sales coming from replacement demand and only 10% to15% from more cyclical new housing demand. It also helps that, of the 110 million HVAC units installed in the U.S., about 92 million of them are over 10 years old -- older equipment tends to be serviced more.
It's a highly fragmented market, but Watsco is the clear market leader with more than 2.5 times the revenue of its nearest competitor. It's a position built up partly through its joint venture with United Technologies' (RTX -0.35%) HVAC company, Carrier -- one the largest HVAC suppliers in the world and a company set to be spun off in 2020. Moreover, as the market leader, Watsco continues to consolidate the industry, pursuing a policy of buying and building its business by acquiring smaller companies in order to gain market share or expand its geography.
This has resulted in a company with relatively stable operating margins -- a hallmark of a boring company -- with a revenue growth opportunity by consolidating its industry. It's all added up to some impressive operating income growth over the year, as the revenue increases have dropped into profits thanks to stable margins.
WSO Revenue (TTM) data by YCharts
Throw in the potential to improve productivity through using web-enabled devices to help its contractors be more effective in the field, and there is an opportunity to expand margin even more. That's something that its investors -- already enjoying a 3.5% dividend yield -- will surely welcome.
Cintas: the apparel company
It's a bit of a stretch to call Cintas a dividend play -- a 1% yield won't satisfy most investors -- but it's definitely a boring company. After all, it's hard to make providing corporate uniforms and apparel sound like an exciting business. No matter, Cintas shareholders won't care about that. Instead, they will simply point to the stock's market-busting performance over the last decade should they need a thrill or two.
In addition, if you had bought Cintas a decade ago -- and the price of the stock was still at around $29 then -- it would be yielding close to 9% right now. Dividend increases aren't just important for the income; they can also lead to substantive capital gains due to stock price appreciation.
Moreover, Cintas isn't just about uniform rental, because once it's established a point of contact with a customer it can sell other services such as restroom cleaning, carpet and tile cleaning, and first aid and safety products and services, too.
Just as with Watsco, Cintas is a business operating within a profitable niche and with an opportunity to build scale. However, the interesting thing is that Cintas has also demonstrated an ability to expand margin over time -- although to be fair, this is also partly a function of ongoing growth in the economy and tightening labor market.
CTAS Revenue (TTM) data by YCharts
If you believe the U.S. economy is headed for long-term growth, then Cintas is well worth a look.
Clorox: The cleaning and household products company
You can't get much more boring than home care and professional cleaning products (34% of revenue), household products including cat litter, bags, and charcoal (totaling 30% of revenue), and assorted lifestyle products (20% of revenue) including water filters, dietary supplements, and personal care products.
That said, 80% of its brands are No. 1 or No. 2 within their product category, and management is on a drive to improve margin and free cash flow (FCF) generation via cost-cutting and investing in its leading brands. As such, FCF generated from sales has improved to 13% in 2019 from just 10% in 2014.
As a result, Clorox has been able to expand its dividend per share over the years -- in fact, Clorox is a dividend aristocrat, having raised its dividend for more than 25 consecutive years -- and it currently sports a 2.8% dividend yield.
CLX Free Cash Flow Per Share data by YCharts
If Clorox can continue to be a market leader, its longtime history of raising dividends is likely to continue.
Stocks to buy?
None of these stocks are particularly cheap -- they all trade on a forward P/E ratio around 20 -- but if forced to pick one of them, then Watsco stands out as having a combination of revenue and margin expansion prospects. The installed base of HVAC units promises solid underlying growth, while the opportunity to use technology to improve productivity is compelling.
