Ecolab: A High-Quality Dividend Aristocrat That Passes Under The Radar
Ecolab (ECL) is a Dividend Aristocrat which has offered extremely good returns to its shareholders over the last decade. It has rallied 306% during that period and thus it has outperformed the S&P 500, which has rallied 278%. Nevertheless, Ecolab passes under the radar of most investors. On the other hand, it is one of the 21 stocks held by the Bill & Melinda Gates Foundation.
So it's worth trying to understand the key advantages of Ecolab and put the stock on your radar.
Ecolab is a leader in water treatment, purification and hygiene technologies and services. It operates in three major business segments: Global Industrial, Global Institutional, and Global Energy. The former includes customers in the food & beverage, manufacturing and chemical industries while the Global Institutional segment includes restaurants, hotels, hospitals and retailers. The Global Energy segment includes customers in the oil industry.
Ecolab was initially hurt by the pandemic, which caused a severe downturn for many customers of the company, such as restaurants and hotels. As a result, the company incurred a 31% decrease in its earnings per share in 2020.
Fortunately, thanks to the massive vaccine rollout and the unprecedented fiscal stimulus packages offered by most governments, the global economy is recovering strongly from the pandemic. Ecolab has greatly benefited from this tailwind.
In the third quarter, it grew its organic revenue by 8% over the prior year’s quarter and its adjusted earnings-per-share by 20% thanks to volume growth and price hikes, which more than offset high cost inflation. The steep recovery of the U.S. restaurant and lodging markets from the pandemic more than offset cost inflation and the decline in the sales of the healthcare segment, which resulted from the abnormally high sales in the prior year’s quarter amid the pandemic. Even better, Ecolab expects the strong momentum to remain in place in the upcoming quarters and expects double-digit earnings-per-share growth in the fourth quarter.
Ecolab spends more than $1 billion on research and development every year. As a result, it has created thousands of patents and has become a global leader in its business. Its reputation and its scale constitute significant competitive advantages.
Thanks to its strong business model, Ecolab has consistently grown its revenues and its earnings for decades. First of all, a major growth driver is the expansion of the company in international markets. In addition, Ecolab has performed several acquisitions of smaller companies and has successfully incorporated their products in its immense network. In this way, it has enhanced both its offerings and its customer base.
Thanks to these growth drivers, Ecolab has grown its earnings per share every year in the last decade, except for the flat year 2016 and the pandemic-impacted year 2020. On average, the company has grown its earnings per share at a 7.6% average annual rate over the last decade. Given the somewhat low comparison base formed in 2021 due to the pandemic, we view the 10-year growth rate of Ecolab as conservative and expect the company to grow its earnings per share by 13% per year on average over the next five years.
Thanks to its leading business position and the continuous expansion of its product portfolio and its customer base, Ecolab is a Dividend Aristocrat, with 29 consecutive years of dividend growth. Given its low payout ratio of 39% and its rock-solid balance sheet, the company will easily continue raising its dividend for many more years. On the other hand, the stock is offering a dividend yield of only 0.9% and hence income-oriented investors should wait for a more opportune entry point.
Final Thoughts
To conclude, Ecolab is a high-quality Dividend Aristocrat and a global leader in its business. While its business may seem mundane to most investors, the company has a wide business moat and thus it has offered strong returns to its shareholders. On the other hand, as the S&P 500 has more than doubled off its bottom in 2020, with 70 new all-time high in 2021 alone, it is only natural that Ecolab is richly valued right now. Therefore, investors should put the stock on their radar and wait for a meaningful correction of the stock.
Disclaimer: Sure Dividend is published as an information service. It includes opinions as to buying, selling and holding various stocks and other securities. However, the publishers of Sure ...
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