With two vaccines on the way and more in the pipeline, social and work life in America should (hopefully!) look more normal than not by the second half of 2021, suggests Brett Owens, dividend investing expert and editor of Hidden Yields.
A.O. Smith (AOS) is the type of underappreciated cash cow that smart investors are already beginning to accumulate in anticipation of this comeback.
The company heats water and treats water. Its water heater business makes up 58% of sales to both residential and commercial customers. Its ProLine water heaters are sold by local plumbing contractors, while its Signature Series is available exclusively through Lowe's (LOW)
The US residential water heater industry is doing just fine, up 4% year-over-year. The commercial water heater industry, however, is down about 10% from 2019. This is weighing on AOS's sales and earnings for 2020.
However, this should be a temporary issue. The commercial buyers who punted their purchases in 2020 will likely make their buys in 2021 and 2022 and when they do, AOS's profits should pop as a result.
The firm's China business is 25% of sales and has already bounced back. With lockdowns a thing of the past, the Chinese economy has been open for many months and AOS is enjoying mid-single-digit growth there (it'd be even better were it not for local currency declines).
With two vaccines on the way and more in the pipeline, social and work life in America should (hopefully!) look more normal than not by the second half of 2021. AOS is the type of underappreciated cash cow that smart investors are already beginning to accumulate in anticipation of this comeback.
The firm follows our favorite one-two formula for putting money in shareholders profits:
- Management increases the dividend every year by a meaningful amount that results in a "dividend double" every four to five years.
- The company buys back its own shares regularly so that each key metric (such as free cash flow per share and dividend per share) looks better and better.
Over the last five years, including this challenging 2020, AOS has increased its free cash flow per share by an impressive 80%. This cash has been used to increase the dividend by 117% and buy back 8% of outstanding float.
Management put its buyback program on hold when things got real earlier this year. When AOS's repurchases resume, it will be one more catalyst to send the stock higher.
