Water is one of the most vital components of life, asserts Bob Ciura; in this special 5-part report, the editor of Sure Dividend continues his review his current top recommendations in the water sector.
In general, water stocks have simple business models and are resilient to recessions thanks to the essential nature of their business. This article will discuss a top water stock, Gorman-Rupp (GRC).
Gorman-Rupp began manufacturing pumps and pumping systems back in 1933. Since that time, it has grown into an industry leader with annual sales of about $470 million. Today, Gorman-Rupp is a focused, niche manufacturer of critical systems that many industrial clients rely upon for their own success. Gorman-Rupp generates about one-third of its total revenue from outside of the U.S.
On July 29th, the company announced second-quarter financial results. Quarterly revenue of $119 million rose by 28% year-over-year, and beat analyst estimates by $14 million. Excluding the acquisition of Fill-Rite, sales increased 13.4%. Domestic sales were a source of strength for the company last quarter. U.S. sales increased 32.4% for the quarter, while international sales increased 18.1%.
The water businesses continued to lead the way. Excluding Fill-Rite, sales in its water markets increased 16.7% in the second quarter. Adjusted earnings-per-share of $0.27 missed expectations by $0.05 per share, and declined 15.6% year-over-year. The company is battling the effects of cost inflation, as gross margin contracted by 280 basis points last quarter due to a 500-basis point increase in cost of materials.
Going forward, we are forecasting 6% earnings-per-share growth per year over the next five years. The company can achieve this result mostly through low single-digit sales growth. Given the company’s robust backlog, which stood at $264.7 million as of June 30th, we see revenue growth continuing for many years. Gorman-Rupp’s primary earnings growth driver is revenue growth as well as cost containment efforts to help combat inflation.
Dividend Safety & Expected Returns
Gorman-Rupp has an excellent dividend history. The company has increased its dividend for 49 consecutive years. The most recent increase was a 10% dividend raise in October 2021. If it can raise its dividend this year, it will join the exclusive list of Dividend Kings. Shares of Gorman-Rupp currently yield 2.2%.
It is highly likely the company will continue to increase its dividend each year going forward, thanks to its strong business model, recession-resilience, and low payout ratio. Gorman-Rupp’s expected payout ratio for 2022 is 47%. With a payout ratio under half of earnings, the company should have little trouble growing its dividend payout.
The company’s competitive advantage is in its many decades of experience in providing innovative solutions for niche, but critical, engineering problems facing its customers. While Gorman-Rupp is not immune to recessions, the company has a proven track record of quickly recovering from downturns and posting higher earnings over time. This, in turn, has fueled its long history of dividend increases.