Do you have a hot water heater? Do you know anyone else who does? Is there any 10-year-old or older buildings where you are? Is there any new construction going on near you maybe? A. O. Smith, AOS, makes hot water heaters. Check ’em out on-line.
They’ve got a great thing going on in China, where their burgeoning middle class is clamoring for more western amenities, like hot water. AOS’s sales are booming!
You should know the drill by now. I have to find issues that have handily outperformed the S&P 500 by 3 specific metrics. Their EPS line must be far smoother, and to have grown far greater. The historical dividend payout pattern has to be an ever-growing, stair-step pattern of annual increases in the low double-digits. The share price has to have appreciated far greater than the 500, in keeping with the beautiful EPS line and growth, and that dividend payout.
Then, I have to see evidence that it can still keep that performance up, in the future… which is, of course, always harder to divine. Finally… the dividend, and its growth, have to be SAFE. This is determined by what % of its EPS is being paid out as cash to shareholders. I don’t want to see any more than 40% of EPS going out the door, that they retain at least 60% for R&D and/or marketing, etc. So how does AOS stand up in these regards?
The EPS line for an average of all 500 companies in the S&P starts 10 years back at $3.14, and is $4.54 today, for an EPS growth of 44.6%. There is a cut in EPS during the ’08/’09 GFC of some 64%, but it reverses to the upside for some 275%, to todays estimate number. AOS, on the other hand, has an EPS estimate of $.50 ten years ago, and that number is $2.10 a share today, for 320%, or better than 4-fold growth! PLUS, the EPS decline during the GFC isn’t anything like that picture for the 500… not even close.
Next, we look at historical dividend payout. For an average of all the dividend paid out among S&P issues, that number 10 years ago was $.74 a share then, and is currently $1.40 a share, for dividend growth of 89%. There is a GFC dividend cut of 22.5%, whereas AOS has a dividend payout that was $.11 a share 10 years ago, but is $.56 a share today for 409% dividend growth, or better than a 5-fold increase! Oh, and there was no GFC dividend cut either… None. Cool, huh?
Did these matters affect share price any? Was the quality we found reflected in how share price performed? The average share price for the stocks in the 500 have advanced in value by 98.7%, from $48.21 to $95.81. AOS was $6.40 ten years ago, and is $50.27 as I type. That’s an appreciation of 685.5%, or way better than 7-fold increase, and closer to an 8-fold move. The 500 took a far greater than 50% hit during the GFC. I calculate the average smack-down to have been 59%. AOS didn’t skate thru unscathed. It was cut by nearly the same amount, peak to trough. But, the quality never went away by that much, so it was a worthy hold.
A. O. Smith’s dividend safety is within the top 10% for all dividend payers, and is currently paying a $.56 a share dividend against a $2.10 estimate, which is not even a 27% payout. The payout on current earnings is 30%. I could see being paid more than 10% on my current investment, as my yield on shares I have now, some 10 more years down the road!
Future growth is estimated to be in the low double-digits, and so I consider A. O. Smith to be a champion hold for the long-haul. Check it out! You might come to the very same conclusion, and want some for yourself!
Here’s to your successful investing!
Harold F Crowell