The Dividend Aristocrats are a select group of 66 stocks in the S&P 500 Index that have each raised their dividends for at least 25 consecutive years. In this five-part series, Ben Reynolds — editor of Sure Dividend — highlights his five favorites.
Many of the Dividend Aristocrats are household names that most people can instantly recognize. But there are also many Dividend Aristocrats that are not as well-known.
Although these less-recognized names may fly under the radar, they have strong business models. And, they have demonstrated the ability to consistently raise their dividends over time.
Pentair plc (PNR) is a prime example of an under-followed Dividend Aristocrat, but one that deserves more attention from investors due to its excellent track record of dividend growth.
Profiting From One of Life’s Basic Necessities
Pentair is a water solutions company that operates in 3 segments: Aquatic Systems, Filtration Solutions, and Flow Technologies. Pentair was founded in 1966, and has increased its dividend for 45 years in a row, when adjusted for spin-offs, which makes Pentair a member of the Dividend Aristocrats.
The company continues to benefit from the strong U.S. economy. In the 2021 fourth quarter, Pentair generated revenues of $990 million, which was up 24% from the previous year’s quarter. Core sales, which excludes the impact of currency rate movements, acquisitions, and divestments, rose 19% year over year. Earnings-per-share of $0.87 rose 24% year-over-year.
The company issued strong guidance for 2022 as well, expecting another strong year ahead. For fiscal 2022, Pentair is now forecasting earnings-per-share in a range of $3.70 to $3.80, which indicates growth of approximately 13% compared to the $3.32 the company earned in 2021.
Pentair management believes that a long-term earnings-per-share growth rate of 10% is possible. The company aims to achieve this growth through a combination of rising revenues, which will be possible thanks to organic growth and acquisitions, and through margin expansion and share repurchases, which will lead to further declines in Pentair’s share count.
Above-average operating efficiency is one of Pentair’s advantages over peers. The company employs a strategy called the Pentair Integrated Management System which has allowed its organizational structure to remain lean, and which has allowed the company to grow its already strong margins in the past.
Future EPS growth will easily allow the company to continue increasing its dividend each year, while shares also appear undervalued right now.
Valuation & Expected Returns
Pentair stock is expected to generate total annual returns of 13.0% over the next five years. This level of return will be derived from a combination of the company’s future earnings growth, dividends, as well as an expanding P/E multiple.
We expect Pentair to grow its EPS by 6.5% per year over the next five years. In addition, the stock has a current dividend yield of 1.5%.
Lastly, shares of Pentair trade for a 2022 P/E ratio of 14.8. Our fair value estimate for Pentair stock is a P/E of 19. If the P/E expands from 14.8 to 19 over the next five years, it would boost shareholder returns by approximately 5% per year. Overall, this leads to total expected returns of 13.0% per year.