The Best Performing Dividend Aristocrat over the past decade is a boring business that few ever talk about
The company is Cintas (CTAS), which engages in the provision of corporate identity uniforms and related business services primarily in the United States, Canada, and Latin America. It operates through Uniform Rental and Facility Services, First Aid and Safety Services, and All Other segments.
This dividend aristocrat has increased dividends to shareholders for 41 years in a row.
It has generated a total return of over 1,381% over the past decade
It's fascinating to dig further into the sources of those returns.
As we have discussed before, total returns are a function of:
1. Dividends
2. FCF/Share Growth
3. Changes in valuation
Annual dividends increased from $0.77/share in 2014 to $5.40/share in 2024. That's a 601% growth in dividends per share, which is great. Dividend growth was higher than earnings growth notably due to the expansion of the payout ratio from 20% in 2014 to 32.90% in 2024.
Someone who invested in Cintas at the end of 2013 earned a starting dividend yield of 1.30%. However, if they kept the stock they ended up with an yield on cost of 9.06% today (without accounting for dividend reinvestment). If they reinvested dividends, they ended up with an yield on cost of 10.30%. A lot of people would have ignored Cintas in 2013 for the low current yield, and favor higher yielding companies. But fast forward, Cintas now has a double digit yield on cost, while many of those higher yielders have barely managed to grow dividends to compensate for the eroding power of inflation. Plus, with Cintas you had with a very high total return of 1,381%.
FCF/share increased from $3.82/share in 2014 to $16.43/share in 2024. That's a 330% growth in earnings per share over the period, which is a remarkable result.
The stock sold at $59.59/share at the end of 2013. It sells at $782.95/share now.
Back at the end of 2013, the stock sold at a Price to FCF of 15.60. The dividend yield was 1.30%
Today, the stock sells at a Price to FCF of 47.65. The dividend yield is 0.69%.
The company delivered a total return of roughly 1,381% over that time period.
A large portion of this total return was a result of the valuation multiple increasing from 15.60 times FCF to 47.65 times FCF.
If the valuation multiple had stayed the same, the price would have only increased by 330% - which was the same as FCF/Growth. The price would be $256.30/share, rather than $782.95.
Dividends accounted for a portion of the 1,381% total return as well. If you just look at the share price, total returns would have been 1,210%. So dividends accounted for about 170% of the total returns figure. If the valuation multiple had been lower, dividends would have accounted for a higher portion of the total return.
It seems that the largest contributor to total returns for Cintas over the past decade (or since Dec 2013 to be precise) is the expansion in the valuation multiple.
If it had stayed flat, investors would have generated a total return of roughly 500%. But due to P/FCF ratio increasing threefold from 15.65 to 47.65, total returns shot up to 1381%.
Now I believe that Cintas is indeed a great company, the type of boring sleep well at night time to hold. It is very likely that it would keep growing FCF/share and dividends per share over the next decade. (fundamental returns).
However, the high FCF/share does create a sort of lack of margin of safety for the buyer of stock at today's lofty valuations.
The risk is that valuation mutliples shrink over the next decade or two. After all, those multiples are often times driven by the emotions of the investors out there, who tend to oscilate between fear and greed. Right now, we seem to be in a greed fueled compounder bro bubble of sorts. It's great to buy and hold quality companies, but not at any price.
If you overpay dearly for a future stream of earnings and dividends, you may spend a long time recouping your investment, even if it does perform fundamentally according to plan.
In other words, the risk for todays investor is that the company delivers, but the valuation multiple shrinks. As a result they'd be left with minimal returns over the next decade. Which is eternity in the face of Twitter, where share prices dictate the investment narrative.
For example, if Cintas were to triple earnings per share over the next decade, but the valuation multiple shrinks to 16, the investor would generate small returns. The only source of returns would be the dividend.
Now I am not sure what may cause a decline in the P/FCF ratio. But when you pay a lofty starting valuation, you are basically projecting perfection. Unfortunately, real life is far from perfect.
You do not want to be in a position where you overpaid for a security, which experienced a valuation shrinkage. You definitely do not want to be in a situation where you experience valuation shrinkage coupled with lowered fundamental performance at all.
It's important to have a margin of safety, just in case.
In the words of Ben Graham: “the function of the margin of safety is, in essence, that of rendering unnecessary an accurate estimate of the future.”
