Posting total returns of over 600% and 3,300% over the last 10 and 20 years, Pool Corp. (POOL 0.32%) has been nothing short of unstoppable. As the leading pool products and supplies distributor in the United States, the aptly named company was added to the S&P 500 index in 2020 amid its incredible run of outperformance.
Nevertheless, following a lockdown-fueled boom for its operations in 2021, Pool's share price has dropped over 30% as consumers continued to rein in discretionary spending.
Making matters worse, cool and wet weather in the company's core U.S. geographies further hindered growth, contributing to a 15% sales decline in the first quarter of 2023. However, despite these short-term struggles, history may suggest that buying Pool right now could be a good long-term decision.
Let's explore three key reasons why.
A stellar return on invested capital
Leveraging the power of its leadership position in the pool supplies and pool-related products market, Pool Corp. has developed into one of the strongest compounders on the market. In addition to nearly quintupling its revenue since 2009, the company has delivered steady net profit margin expansion.
POOL Profit Margin data by YCharts
Powered by this streamlined efficiency, Pool's return on invested capital (ROIC), which measures its profitability compared to its debt and equity, has gradually ascended. While its ROIC has been halved since its 2021 highs, its current mark of 25% still places the company in the top quintile of the S&P 500.
This is important to investors as stocks with higher ROICs have historically outperformed their lower-ranked peers. Thanks to this outsize profitability and its subsequent conversion to free cash flow (FCF), Pool can invest in new growth verticals or acquisitions.
Recently buying Porpoise Pool and Patio for $790 million, the company diversified into the retail side of the pool supplies market while picking up a specialty chemical operation that helps vertically integrate its business. Management sees similar expansion potential in the future with commercial pools, patio and irrigation products, and international markets, leaving a long growth runway ahead.
Best yet for investors, Pool's strong profitability also allows it to reward shareholders through rising dividends in addition to this intriguing growth optionality.
A Dividend King in the making?
As impressive as Pool's historical growth rates and future expansion plans look, its ability to return cash to shareholders along the way has been equally remarkable. Increasing its dividend payments for 12 straight years, Pool now pays a 1.2% dividend that has grown by 20% annually over the same time.
Despite this rapid dividend growth, the company's payout ratio has dropped over the last decade.
POOL Payout Ratio data by YCharts
Measuring the percentage of net income used to pay its dividend, Pool's declining figure is somewhat astonishing, considering how fast its dividend has grown. Thanks to this low payout ratio, Pool has massive dividend increase potential over the long haul, giving it an outside chance to become a Dividend King with 50 years of consecutive dividend increases.
Generating 83% of its sales from primarily non-discretionary sources like maintenance, repairs, remodeling, and renovations, Pool's revenue is incredibly stable, allowing it to raise its dividend comfortably. These durable sales help make the company a surprisingly steady compounder, despite operating in what would otherwise be an incredibly cyclical industry.
With dividend growers in the S&P 500 outperforming the index as a whole by 2.5% annually from 1973 to 2022, history suggests that Pool's dividend track record and ample room for future growth give it market-beating potential.
A once-in-a-decade valuation
In addition to Pool's high ROIC and rising dividend looking like market-beating indicators, its current price-to-earnings (P/E) ratio of 22 is well below its average over the last 10 years.
POOL PE Ratio data by YCharts
Furthermore, following its recent 10% dividend increase, the company's dividend yield has also jumped above its 10-year average. This comparison often indicates an attractive valuation for dividend growth stocks with well-funded payments as investors now receive more passive income potential for their invested dollars.
Overall, Pool Corp. could be a top stock in July due to these attractive valuation metrics and the company's high ROIC and rising dividend. While it may take a few quarters -- if not a year or two -- for the broader pool industry to fully rebound, investors looking to hold for decades should give this unstoppable-looking compounder a long look -- especially at its current discount.
