One of the most endearing traits of so-called "boring stocks" is their predictability. These oft-forgotten stocks offer stability in otherwise volatile markets, whether through diversified operations or a consistently increasing dividend. As investors continue to get bounced around in a more-volatile market seemingly averse to growth and technology stocks, attention seems to turn toward more stable alternatives, like the newest S&P 500 index member -- and now, Dividend Aristocrat -- Nordson (NDSN -0.98%).
Thanks to its well-diversified end markets and 25 straight years of annual dividend increases, Nordson's unique business caught the attention of the folks at S&P Global. Let's take a closer look at why individual investors should also consider paying attention to the stock.
Nordson is seeing growth on two fronts
Founded in 1956, Ohio-based Nordson operates in two business segments, Industrial Precision Solutions (IPS) and Advanced Technology Solutions (ATS), offering precision technology products to its customers. Through these segments, Nordson sells to five key end markets:
- Electronics: semiconductor and wafer-level packaging, printed circuit boards, electronic component assembly, etc.
- Consumer non-durables: box sealing, diapers, food packaging, container and bottle labeling, etc.
- Medical: balloons, extrusions, catheters, fittings, connectors, fluid transfer components, etc.
- Industrial: heavy machinery, rigid containers, energy, aerospace, chemical, and defense.
- Remaining markets: automotive, consumer durable, and animal health.
Electronics is Nordson's largest end market, accounting for 29% of sales, with remaining markets being the smallest, at 12% -- highlighting its beautifully balanced operations. Similarly, IPS accounts for 53% of sales, while ATS accounts for 47%.
Further diversifying Nordson's operations is that only one-third of its total sales come from the United States, with Asia accounting for another third of sales and Europe generating 26%.
Best yet for investors, 55% of Nordson's sales come from parts and consumables, creating a large base of recurring revenue for the company.
While the company has only averaged 6% sales growth over the last five years, it saw 16% year-over-year revenue growth for the first quarter of 2022. This surprising spike in sales came from its electronics and medical end markets, which grew by over 40% and double-digits, respectively.
Despite the vast majority of this sales growth being organic in Q1, management plans to add $500 million in additional annual sales through mergers and acquisitions (M&A) over the next few years. These new M&A sales would bring a further 15% increase to Nordson's top-line, as it generated nearly $2.4 billion in sales during 2021.
Kicking off this M&A spree, Nordson acquired NDC Technologies in 2021 for $180 million -- adding $90 million in sales and $15 million in earnings before interest, taxes, depreciation, and amortization (EBITDA).
Thanks to this acquisition and strong organic growth, management is guiding for revenue growth of 7% to 10% and earnings-per-share growth of 14% to 18% for 2022.
Through its 20% profit margin, Nordson's consistent and robust bottom line has enabled it to generate consistent free cash flow that has led to dividends and consistent increases in the dividend for 25 straight years. While it has followed the parameters needed to be named a Dividend Aristocrat, it was being added to the S&P 500 in February that sealed the final qualification criteria for the title.
While its dividend yield of 0.9% may not scream high-yield potential to investors, Nordson has grown its dividend by an average of 15% annually over the last decade. For example, if you had bought shares 10 years ago, you would now yield 4.1% on your original cost.
Furthermore, with a payout ratio of only 21%, Nordson could quadruple its dividend and still have money left over, demonstrating how secure its ability to raise the dividend is. A company's payout ratio takes its dividends paid out for the year divided by its earnings per share and can be used to measure the health of its dividend. Dividend-growing stocks with a payout ratio below 50% are strong because they demonstrate a balance between returning cash to shareholders and fueling future growth within the company.
Historically, dividend-growing S&P 500 members with a payout ratio below 50% tend to outperform their index peers, which put Nordson on my watchlist.
Trading at 25 times forward earnings, Nordson trades very close to the median price-to-earnings ratio of its new S&P 500 peers. However, I believe its balance between organic and M&A growth, massive 20% profit margin, and track record of dividend increases make it an excellent buy for long-term dividend-growth investors.