Updated on April 19th, 2024 by Bob Ciura
Every year, we individually review all the Dividend Aristocrats. This is because we view them as particularly appealing stocks for long-term dividend growth investors.
The Dividend Aristocrats are a select group of stocks in the S&P 500, with 25+ years of consecutive dividend increases.
You can see a full downloadable spreadsheet of all 68 Dividend Aristocrats, along with several important financial metrics such as price-to-earnings ratios, by clicking on the link below:
Disclaimer: Sure Dividend is not affiliated with S&P Global in any way. S&P Global owns and maintains The Dividend Aristocrats Index. The information in this article and downloadable spreadsheet is based on Sure Dividend’s own review, summary, and analysis of the S&P 500 Dividend Aristocrats ETF (NOBL) and other sources, and is meant to help individual investors better understand this ETF and the index upon which it is based. None of the information in this article or spreadsheet is official data from S&P Global. Consult S&P Global for official information.
The next Dividend Aristocrat in our 2024 series is A.O. Smith (AOS). A.O. Smith has increased its dividend for 30 consecutive years.
This article will discuss A.O. Smith’s business model, growth prospects, and valuation.
Business Overview
A.O. Smith is a leading manufacturer of residential and commercial water heaters, boilers and water treatment products. A.O. Smith generates two-thirds of its sales in North America, and most of the rest in China.
A.O. Smith was founded in 1874 and is headquartered in Milwaukee, WI. The company generates annual sales above $9 billion.
Source: Investor Presentation
A.O. Smith reported its fourth-quarter and full-year earnings results on January 30th. The company generated revenue of $990 million during the quarter, which represents an increase of 6% compared to the prior year’s quarter.
A.O. Smith’s revenue were up by 7% in North America, while revenues saw a smaller increase in the rest of the world.
Earnings-per-share of $0.97 during the fourth quarter rose 13% on a year-over-year basis. This was thanks to higher revenue, margin expansion, and share repurchases that reduced the share count.
A.O. Smith has announced its guidance for 2024. The company is forecasting earnings-per-share in a range of $3.90 to $4.15, which reflects that management expects earnings-per-share to grow meaningfully this year.
At the midpoint of the guidance range, earnings-per-share would be up 6% versus 2023. A.O. Smith is forecasting that revenue will increase by 3% to 5% this year.
Growth Prospects
A.O. Smith’s growth catalysts in the U.S. include continued economic growth and increasing housing prices. As a manufacturer of water heating, water treatment, and air purification products, the company is reliant on a financially healthy consumer and housing market.
When home prices are rising and unemployment is low, consumers with disposable income are much more willing to invest in upgrades like new water heaters.
The company has enjoyed consistent growth in the domestic market throughout most of the last decade.
Going forward, emerging markets such as China are set to drive A.O. Smith’s growth.
Source: Investor Presentation
China’s huge population, its robust GDP growth, and its booming of its middle class are major tailwinds in this important market. In addition, thanks to the severe pollution of the country, the demand for air purifiers should remain strong as well.
We expect A.O. Smith to grow earnings-per-share at a rate of 6% per year through 2029. We believe the company should be able to achieve at least this level of growth due to organic revenue growth and share repurchases, with potential additional acquisitions adding further growth.
Competitive Advantages & Recession Performance
A.O. Smith’s strong growth is due to its competitive advantages, primarily its top market share. A.O. Smith has the #1 market share in U.S. water heaters. It holds over 30% domestic residential share and over 40% of the commercial market share.
Possessing the top industry position gives A.O. Smith pricing power and high margins. In turn, this provides the company the ability to generate lots of cash flow, which enables it to invest in new product innovation.
One potential risk for A.O. Smith is a recession. As a manufacturer, the company is closely tied to the health of the overall economy. It is not a highly recession-resistant business model.
Earnings-per-share during the Great Recession are below:
- 2007 earnings-per-share of $0.48
- 2008 earnings-per-share of $0.49 (2% increase)
- 2009 earnings-per-share of $0.57 (16% increase)
- 2010 earnings-per-share of $0.43 (25% decline)
- 2011 earnings-per-share of $0.60 (39% increase)
As you can see, the company performed very well during 2008 and 2009, the worst years of the recession. Earnings took a significant hit in 2010 but quickly recovered in 2011.
Overall, the company performed exceptionally well, since it was still able to grow earnings over the course of the recession.
Valuation & Expected Returns
Based on the current share price of ~$86 and the midpoint of 2024 EPS guidance of $4.03, A.O. Smith shares currently trade for a price-to-earnings ratio of 21.3. We believe a price-to-earnings multiple target of 19 is an appropriate fair value estimate for AOS stock.
As a result, A.O. Smith seems overvalued right now. If the P/E multiple were to decline to the fair value estimate of 19, it would reduce annual returns by 2.3% over the next five years.
Shareholder returns will also be boosted by earnings growth and dividends, which together add up to 7.5% annualized returns. In summary, total returns are expected to be 5.5% per year over the next five years, since valuation multiple compression is expected to slightly offset the expected earnings-per-share growth and the dividend.
Final Thoughts
A.O. Smith is an industry-leading company. It has the top brand in its category, with compelling future growth potential. It has such a dominant market share of its industry that the company can continue to overcome short-term difficulties. Over the long term, we believe the potential growth opportunities in emerging markets are highly attractive.
While the dividend yield is on the low side, the company’s dividend growth pace and track record is impressive.
However, the stock valuation remains slightly elevated. As a result, we view the stock as relatively unattractive to purchase. As a result, we rate AOS stock a hold for now.
Additionally, the following Sure Dividend databases contain the most reliable dividend growers in our investment universe:
- The Dividend Contenders List: 10-24 consecutive years of dividend increases.
- The Dividend Challengers List: 5-9 consecutive years of dividend increases.
- The Dividend Champions: Dividend stocks with 25+ years of dividend increases, including those that may not qualify as Dividend Aristocrats.
- The Dividend Achievers: dividend stocks with 10+ years of consecutive dividend increases.
- The Dividend Kings: considered to be the ultimate dividend growth stocks, the Dividend Kings list is comprised of stocks with 50+ years of consecutive dividend increases
If you’re looking for stocks with unique dividend characteristics, consider the following Sure Dividend databases:
- The Complete List of Monthly Dividend Stocks: stocks that pay dividends each month, for 12 payments over the year.
- The Blue Chip Stocks List: this database contains stocks that qualify as either Dividend Achievers, Dividend Aristocrats, or Dividend Kings.
The major domestic stock market indices are another solid resource for finding investment ideas. Sure Dividend compiles the following stock market databases and updates them monthly: