Rockwell Automation (NYSE:ROK) just announced better than expected earnings and a blowout quarter of free cash flow growth. During its conference call, management discussed both avenues of strong potential growth but also two important headwinds that could make 2015 a challenging year for this midcap industrial dividend stock.

Booming sales in Latin America represent one of the few bright spots for sales growth
From CEO Keith Nosbusch:

Latin America was a standout region with 18% growth. Brazil and Mexico continued to grow about 10% and we saw even higher rates of growth in selected other countries in the region. ... We expect Latin America to be our highest growth region this year and they are off to a great start.

With just 8.5% of sales coming from Latin America this quarter, this fast-growing region likely represents the company's best growth prospect in the years ahead. Among other markets, only Canada, representing 6.4% of total sales, showed much growth over the last quarter, with sales rising 8.2%. Meanwhile, sales in the U.S., Asia,, and the Middle East and Africa were largely flat with 0%, 2.9%, and negative 1.1% growth, respectively.

Strong dollar is a growing headwind to growth

One of the big changes since I talk in November is a continued strengthening of the U.S. dollar against a broad basket of currencies. At current rates, we are facing a significantly larger sales headwind then we originally expected.

Euro to US Dollar Exchange Rate Chart
Euro to US Dollar Exchange Rate data by YCharts.

As this chart shows, the U.S. dollar has surged in the last year. That's bad for Rockwell because its products and services become more expensive to foreign buyers. 

Management expects a strong dollar to shave about 4.5% off its sales growth in 2015. Rockwell is only guiding for 2.5% to 5.5% organic sales growth, meaning the rising dollar could consume between 82% and 180% of revenue growth.

In fact, management now projects 2015's midpoint sales and earnings per share to represent a decline of 3% and growth of 7.8%, respectively, compared to 2014. 

Oil price collapse hasn't effect Rockwell ... yet

There is obviously a good deal of noise related to oil and gas. Just like other suppliers, the oil and gas industry, we are trying to understand the near-term and longer term implications of the rapid decline in the price of oil. We did not see any negative impact to our business in Q1 and our front backlog in oil and gas is stable.

While sales to the oil and gas industry make up only 12% of Rockwell's revenue, some customers, such as oil companies that produce both onshore and offshore oil, will almost certainly be affected by the deepest collapse in petroluem prices since the financial crisis.

Weak oil prices reflect a moderate risk to sales growth

We expect to see some shift in spending from large projects in exploration to smaller productivity improvement projects in production similar to what we've experienced in the mining industry over the past couple of years. Lastly, we think midstream and downstream investments are likely to be sustained. Taking all of this into consideration, we see modest risk to our previous sales outlook for fiscal '15 related to lower oil prices. 

This quote highlights the fact that for a slow-growing company like Rockwell, decreased sales from the oil and gas industry might result in earnings misses in 2015. Current and potential investors should be aware of this when making investment decisions and not act too hastily because of quarterly numbers.

Buybacks and dividend growth are key to Rockwell's long-term investment thesis
CFO Ted Crandall:

We continue to expect average diluted shares outstanding to be about 136 million for the full year.

Crandall's words indicate Rockwell, which had 139 million shares outstanding at the end of 2014, plans to buy back at least 3 million shares this year, representing 2.2% of the outstanding share count. This continues Rockwell's long and consistent track record of stock buybacks, which, assuming the share count ends 2015 at 136 million, would represent a compound annual share reduction of 3.13% since 2005.

ROK Average Diluted Shares Outstanding (Annual) Chart
ROK Average Diluted Shares Outstanding (Annual) data by YCharts

Buybacks are important to Rockwell investors because given the company's slow growth, strong share count reduction is required for the company to grow its earnings per share, or EPS, and free cash flow per share; which fuels dividend growth. For example since 2006, Rockwell's total returns have been 11% per year versus 7.9% for the S&P 500

That out performance has come largely from the fact that EPS has grown 114% over the last 10 years, or at an annual compound rate of 7.9%. Even more impressively, free cash flow per share has grown at a 9% compound rate.Thus despite anemic sales growth of 2.8% over the last decade, Rockwell has been able to achieve 12.8% dividend growth yet keep the free cash flow payout ratio a safe and sustainable 34.4%. Even with the company's aggressive buybacks, the total free cash flow shareholder payout ratio -- dividends and buybacks -- is still only 91.5%. This means that Rockwell can continue reducing share count and growing dividends aggressively without dipping into its cash reserves or taking on debt. 

The takeaway: headwinds ahead in 2015, but Rockwell's long-term investment thesis remains intact
Rockwell Automation might face challenges ahead in the forms of a strengthening dollar and lower sales to the oil and gas sector, but management believes it can attain EPS growth rate similar to what it saw in 2014. Its CFO said the company remains committed to returning cash to shareholders in the form of significant buybacks, which should help it grow EPS and allow for continued dividend growth. Thus, while Rockwell isn't likely to set your portfolio on fire like some high-flying growth stocks, I believe it can continue to beat the market when it comes to long-term total returns.