Should Cintas Corporation (NASDAQ:CTAS) Be Part Of Your Dividend Portfolio?
Today we'll take a closer look at Cintas Corporation (NASDAQ:CTAS) from a dividend investor's perspective. Owning a strong business and reinvesting the dividends is widely seen as an attractive way of growing your wealth. Yet sometimes, investors buy a stock for its dividend and lose money because the share price falls by more than they earned in dividend payments.
A slim 0.9% yield is hard to get excited about, but the long payment history is respectable. At the right price, or with strong growth opportunities, Cintas could have potential. During the year, the company also conducted a buyback equivalent to around 2.4% of its market capitalisation. Some simple analysis can reduce the risk of holding Cintas for its dividend, and we'll focus on the most important aspects below.
Explore this interactive chart for our latest analysis on Cintas!
Payout ratios
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. In the last year, Cintas paid out 29% of its profit as dividends. A medium payout ratio strikes a good balance between paying dividends, and keeping enough back to invest in the business. Plus, there is room to increase the payout ratio over time.
Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. Cintas paid out 21% of its free cash flow as dividends last year, which is conservative and suggests the dividend is sustainable. It's positive to see that Cintas's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.
Consider getting our latest analysis on Cintas's financial position here.
Dividend Volatility
From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. For the purpose of this article, we only scrutinise the last decade of Cintas's dividend payments. During this period the dividend has been stable, which could imply the business could have relatively consistent earnings power. During the past ten-year period, the first annual payment was US$0.47 in 2010, compared to US$2.55 last year. Dividends per share have grown at approximately 18% per year over this time.
It's rare to find a company that has grown its dividends rapidly over ten years and not had any notable cuts, but Cintas has done it, which we really like.
Dividend Growth Potential
While dividend payments have been relatively reliable, it would also be nice if earnings per share (EPS) were growing, as this is essential to maintaining the dividend's purchasing power over the long term. It's good to see Cintas has been growing its earnings per share at 26% a year over the past five years. Earnings per share have rocketed in recent times, and we like that the company is retaining more than half of its earnings to reinvest. However, always remember that very few companies can grow at double digit rates forever.
Conclusion
To summarise, shareholders should always check that Cintas's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. It's great to see that Cintas is paying out a low percentage of its earnings and cash flow. Next, growing earnings per share and steady dividend payments is a great combination. Overall, we think there are a lot of positives to Cintas from a dividend perspective.
Earnings growth generally bodes well for the future value of company dividend payments. See if the 13 Cintas analysts we track are forecasting continued growth with our free report on analyst estimates for the company.
If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding above 3%.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.
