C.H. Robinson (CHRW): Quality Dividend Growth at a Reasonable Price

C.H. Robinson (CHRW) has raised its dividend for 18 consecutive years and rewarded shareholders with double-digit annual dividend growth over the last decade.

 

The company’s dividend scores strong marks for safety and growth, and its business model generates excellent free cash flow in practically every economic environment.

 

With large and fragmented markets and numerous competitive advantages, C.H. Robinson has potential to deliver double-digit earnings per share growth going forward.

 

Let’s take a closer look at the business to determine if it could be an attractive dividend growth investment today.

 

Business Overview

C.H. Robinson is one of the largest third-party logistics companies in the world and has been in business for more than 110 years.

 

The business essentially acts as a middleman in the transportation industry, helping connect companies that need to ship goods with cost-effective transportation providers that have capacity available via trucks, railroads, airlines, and ships.

 

C.H. Robinson doesn’t own hard transportation assets such as trucks and is instead a service company that utilizes people and technology to create transportation and supply chain advantages for its customers.

 

The company has over 110,000 customers and maintains relationships with over 68,000 carriers and suppliers, who it purchases shipping capacity from on behalf of its customers. C.H. Robinson’s services essentially help clients lower their costs, improve efficiency, and reduce risk.

 

Truckload (56% of year-to-date 2016 sales) and less-than-truckload (17%) services account for 73% of revenue. The rest of the company’s transportation segment consists of ocean (10%), air (3%), customs (2%), intermodal (2%), and other logistics (4%) services.

 

C.H. Robinson also has a small sourcing business (6%) that sources perishables for grocers and restaurants.

 

By end market, 25% of revenue is from manufacturing, 20% food & beverage, 15% chemical, 14% retail, 11% automotive, 7% paper, 5% electronics, and 3% other.

 

The company’s top 25 customers account for just 12% of total sales, underscoring its diversification.

 

Approximately 15% of C.H. Robinson’s net income is generated from operations outside of the U.S., and the business is investing to become more global.

 

Business Analysis

Many of C.H. Robinson’s advantages come from its scale – the company generates more revenue than top rivals Landstar and XPO Logistics combined.

 

If you were a retailer that needed to cost-effectively ship goods across the country, you would want to use a broker that had access to the greatest number of shipping routes and carriers.

 

If you were a transportation company, you would want to work with a broker that had access to the greatest number of potential customers in need of your shipping services.

 

With access to more than one million pieces of equipment, C.H. Robinson boasts the largest contracted pool of motor capacity in North America.

 

The company has relationships with nearly 70,000 carriers, which provides its shipping customers with supply chain flexibility. In fact, C.H. Robinson delivers an average of three services per top 500 customer.

 

Connecting a global supply chain with hundreds of thousands of participants and even more variables is very difficult, but C.H. Robinson has the necessary relationships, technology, and employees to get the job done efficiently for customers.

 

As C.H. Robinson continues adding more shipping customers and transportation companies, its competitive advantages strengthen.

 

As seen below, the company has expanded its number of transportation company relationships from 40,000 in 2005 to 68,000 at the end of 2015.

 

 

Likewise, its base of shipping customers has more than doubled. This gives C.H. Robinson considerable purchasing power when dealing with transportation companies and helps its smaller shipping customers gain access to more affordable rates compared to what they could achieve going it alone.

 

 

As a result, C.H. Robinson has enjoyed steady growth in shipments, which nearly quadrupled from 4.4 million in 2005 to 16.9 million in 2015.

 

 

C.H. Robinson’s vast network of offices has also helped it build valuable customer and carrier relationships over the course of decades. Close to 50% of its truckload shipments are shared transactions between offices, underscoring their importance and once again putting smaller rivals at a disadvantage.

 

As C.H. Robinson’s network and number of services offered continue to grow, it should be able to take more market share of its large and highly fragmented industries.

 

According a recent company presentation, C.H. Robinson has less than 3% market share across its key areas of business in North America.

 

The company’s revenue has doubled over the past decade, and continued gains should be possible as C.H. Robinson uses its scale, breadth of supply chain services, extensive network, and technological investments to consolidate the market in the coming years.

 

Source: C.H. Robinson Investor Presentation

 

Besides market share gains, several secular changes should serve as tailwinds. Supply chains are increasingly global and complex. It makes less and less sense to keep these operations in-house if you are a business that ships goods.

 

Freight volumes should continue to climb, especially as online shopping grows and businesses outsource more of these complicated supply chain activities.

 

Real-time tracking data and just-in-time inventory are must-haves in today’s world as well, increasing the importance of robust technology systems.

 

For example, C.H. Robinson had nearly 20 million web and mobile interactions with customers and carriers during the last quarter alone – up 30% from the beginning of 2016.

 

Smaller service providers may be unable to keep up with customers’ demands for use of comprehensive, streamlined technology platforms.

 

C.H. Robinson launched Navisphere, its global transportation management system, in 2012. Its platform connects 150,000 customers, carriers, and suppliers by the method of their choice – electronic B2B, web, mobile, and person-to-person.

 

The company’s programs automate more than 70% of all customer interactions and encompass the entire lifecycle of a shipment from notification through the delivery and financial settlement. This allows customers to have full visibility to all shipments and creates moderate switching costs over time.

 

I believe the increasing importance of global transportation management systems and global trade will further pressure the industry to consolidate with larger players such as C.H. Robinson benefiting the most.

 

At the end of the day, I view C.H. Robinson as a simple, time-tested business with numerous opportunities for continued earnings growth.

 

The industry is very competitive with relatively low barriers to entry (hence its fragmentation), but C.H. Robinson’s size, technology platform, breadth of services, and excellent financial health provide support for continued growth.

 

Few companies can match the company’s scalable, reliable, and cost-effective service.

 

All things considered, the company believes it can grow revenue and diluted earnings per share by 5-10% and 7-12% per year, respectively.

 

While this marks a slight deceleration from growth enjoyed over the last decade (9.9% and 11.8% per year for revenue and earnings, respectively), it would certainly make me a happy shareholder if achieved.

 

Source: C.H. Robinson Investor Presentation

 

For investors seeking more information about C.H. Robinson and the third-party logistics market, I came across a great article by Punch Card Research here. While the piece is from late 2014, it still contains plenty of analysis that is relevant for long-term investors.

 

Key Risks

Despite C.H. Robinson’s variable cost structure, its margins can be noisy any given quarter depending on a wide range of factors – fuel costs, truck capacity, freight volume, etc.

 

C.H. Robinson’s transportation margin is the spread between the money it gets paid by customers to help them efficiently ship products and the price it pays transportation companies for their shipping services.

 

The chart below shows the volatility recorded in both prices paid by customers (light blue “YoY Price Change” and prices paid by C.H. Robinson to shipping companies (dark blue “YoY Cost Change” line).

 

The orange line is the transportation net revenue margin realized by C.H. Robinson, which has ranged between 15% and 22% since 2008. The company has recently benefited from the drop in fuel prices, which cause C.H. Robinson’s transportation costs to temporarily fall faster than the contracted rates it maintains with shipping customers.

 

Margins usually compress when demand from shippers is weak and C.H. Robinson is unable to pass on all of its carrier costs to customers.

 

No one knows where margins could trend over the next few quarters, but investors should always be prepared for volatility. Over the long run, however, I expect margins to remain in the high teens like they have historically.

 

Source: C.H. Robinson Investor Presentation

 

What could challenge the high returns enjoyed by C.H. Robinson?

 

For one thing, major transportation companies are continuously trying to bring logistics services in-house and consolidate, reducing the need for middlemen.

 

C.H. Robinson works primarily with small carriers, mitigating some of this risk. The large and fragmented nature of the market further reduces this risk as there are a number of opportunities for growth.

 

Technology advancements are perhaps a bigger threat because they could potentially disintermediate brokers. The rapid rise of Uber is one example of how technology can quickly disrupt previously slow-changing industries.

 

However, the transportation and logistics industry has been deregulated since 1980 and subjected to plenty of competition. C.H. Robinson has its own technology platform (Navisphere) that it is continuously investing in.

 

It also has the balance sheet strength to acquire potential threats and turn them into opportunities. The company’s acquisition of Freightquote.com in 2015 is one example.

 

Many customers and transportation companies have developed a familiarity with C.H. Robinson’s technology, creating some switching costs.

 

New entrants would also need to deal with the challenge of building a two-sided network (C.H. Robinson connects over 150,000 customers and carriers). For now, it doesn’t appear like C.H. Robinson will be disintermediated anytime soon, but it’s worth keeping an eye on.

 

It goes without saying that the brokerage and logistics markets are extremely competitive with relatively low barriers to entry and volatile pricing trends.

 

However, C.H. Robinson’s scale, network relationships, technology platforms, and reputation seem likely to protect its long-term earnings power and growth opportunities.

 

Dividend Safety Analysis: C.H. Robinson

We analyze 25+ years of dividend data and 10+ years of fundamental data to understand the safety and growth prospects of a dividend. C.H. Robinson’s dividend and fundamental data charts can all be seen by clicking here.

 

Our Dividend Safety Score answers the question, “Is the current dividend payment safe?” We look at factors such as current and historical EPS and FCF payout ratios, debt levels, free cash flow generation, industry cyclicality, ROIC trends, and more.

 

Dividend Safety Scores range from 0 to 100, and conservative dividend investors should stick with firms that score at least 60. Since tracking the data, companies cutting their dividends had an average Dividend Safety Score below 20 at the time of their dividend reduction announcements.

 

 

We wrote a detailed analysis reviewing how Dividend Safety Scores are calculated, what their track record has been, and how to use them for your portfolio here.

 

C.H. Robinson’s Dividend Safety Score is 85, which indicates that its current dividend payment is extremely safe.

 

Payout ratios are an important financial ratio used to analyze dividend safety. Low and stable ratios are preferred, and I like to look at long-term trends as well.

 

Over the last four quarters, C.H. Robinson’s dividend payments have consumed 56% and 46% of the company’s earnings and free cash flow, respectively. These are healthy levels that support the current dividend and provide potential for continued dividend increases.

 

Looking further back, we can see that C.H. Robinson’s payout ratios have remained remarkably stable near their current level. Steady payout ratios are usually a sign of a predictable business model and add further support to the dividend’s safety.

 

 

Besides payout ratios, a company’s performance during the last recession is another key factor to consider when evaluating dividend safety.

 

Cyclical companies experience large swings in sales and cash flow, potentially making them more vulnerable to future dividend cuts.

 

Management’s actions during the last recession also offer clues about how committed the company really is to its dividend (i.e. if a company cuts its dividend once, it could be more likely to cut again down the road).

 

C.H. Robinson’s sales fell by 12% in fiscal year 2009, but the company’s diluted earnings per share grew each year and margins remained resilient.

 

CHRW’s stock returned 3% in 2008 while the S&P 500 fell nearly 40%, and management also raised the dividend by 4% in late 2009.

 

The company performs relatively well during economic cycles because of its flexible operating costs (CHRW’s business requires little capital) and the essential nature of its services.

 

 

Goods still need to be shipped, and many of the transportation companies CHRW buys capacity from have favorable rates during economic downturns due to excess capacity issues and lower fuel prices. As a result, C.H. Robinson’s margins expanded during the last recession.

 

 

Another factor supporting C.H. Robinson’s strong Dividend Safety Score is the firm’s consistent free cash flow generation. Free cash flow enables companies to pay sustainable dividends without needing to issue debt or equity.

 

C.H. Robinson’s asset-light business model has been nothing short of a free cash flow machine. The company has generated positive free cash flow for more than a decade, including throughout the last recession.

 

The current dividend ($1.72 per share) would even remain easily covered by the free cash flow generated by the company during 2008-09.

 

 

Another key factor to analyze is a company’s return on invested capital because it provides clues about a company’s economic moat and ability to quickly compound earnings.

 

Businesses that earn high returns on capital create economic value and often have a stronger ability to pay dividends.

 

As a middleman, C.H. Robinson invests primarily in employees and technology. Without requiring factories or heavy equipment, the company is able to generate a very high return on invested capital, underscoring its moat and ability to compound earnings.

 

 

A company’s balance sheet is a major factor influencing dividend safety as well. Compared to debt and interest payments, dividends are discretionary – they will be the first to experience a cut if financial results unexpectedly deteriorate and a business has too much debt.

 

Since C.H. Robinson’s business model requires little capital to operate, the company is able to maintain a very healthy balance sheet.

 

C.H. Robinson could retire all of its book debt using cash on hand and less than one year’s worth of earnings before interest and taxes (EBIT).

 

The company’s long-term debt to capital ratio of 28% is well below my preferred limit of 50% for most businesses, and C.H. Robinson also maintains a $900 million revolving credit facility it can use through December 2019 if it wants to ($450 million is currently outstanding).

 

CHRW’s debt maturity schedule is also extremely manageable. Just over $100 million of the company’s $500 million of long-term debt is due through 2020.

 

Overall, C.H. Robinson’s dividend is extremely safe. The company’s payout ratios are healthy and consistent with past performance, and C.H. Robinson’s business model is very reliable. The company’s asset-light model generates consistent free cash flow each year, holds profits steady during industry downturns, and earns excellent returns on invested capital.

 

The balance sheet is also flexible, providing plenty of room for continued share repurchases, dividend increases, and opportunistic bolt-on acquisitions.

 

Dividend Growth Analysis: C.H. Robinson

Our Growth Score answers the question, “How fast is the dividend likely to grow?” It considers many of the same fundamental factors as the Safety Score but places more weight on growth-centric metrics like sales and earnings growth and payout ratios. Scores of 50 are average, 75 or higher is very good, and 25 or lower is considered weak.

 

C.H. Robinson’s Dividend Growth Score of 68 suggests that the company has very solid dividend growth potential.

 

C.H. Robinson has raised its dividend every year since becoming a public company in 1997, recording a dividend growth streak of 18 consecutive years.

 

As seen below, C.H. Robinson’s historical dividend growth has been solid. The company’s dividend has increased by 8.6% and 15.9% per year over the last five- and 10-year periods, respectively.

 

 

Management last increased C.H. Robinson’s dividend in late 2015, announcing a 13% raise.

 

Going forward, dividend growth will likely be in the high-single to low-double digits range to essentially match earnings growth.

 

C.H. Robinson targets a dividend payout ratio between 40-50%, which is where the company’s payout sits today. This is why future dividend growth will likely match earnings growth, which management expects to average 7-12% per year over the long run.

 

Valuation

Shares of C.H. Robinson trade at a forward-looking price-to-earnings multiple of 19.0 and offer a dividend yield of 2.5%, which is somewhat higher than the stock’s five-year average dividend yield of 2.1%.

 

Management believes the company’s earnings per share can grow 7% to 12% per year over the long term.

 

While trucking demand generally grows with GDP (low-single digits), increased outsourcing of supply chain services should help C.H. Robinson’s market enjoy a growth rate in excess of GDP expansion.

 

I believe C.H. Robinson can also continue growing at a faster pace by expanding its market share with new and existing customers (large and fragmented markets), adding complementary services, growing its global network, and making bolt-on acquisitions.

 

Under these earnings growth assumptions, C.H. Robinson’s annual total return potential is approximately 9-14% (2.5% dividend yield plus 7-12% annual earnings growth).

 

High quality business services firms such as C.H. Robinson rarely come cheap. While the stock’s 19x P/E multiple is a premium relative to the market, it’s a very reasonable price to pay if the company continues generating 30%+ returns on capital and compounds earnings at a double-digit pace.

 

It’s also worth noting that C.H. Robinson’s valuation multiples have contracted over 20% compared to where the stock traded in recent years.

 

Considering the company’s stable cash flow generation, solid track record, and numerous opportunities for long-term growth, the stock seems reasonably priced to me.

 

Conclusion

C.H. Robinson seems to possess good potential for strong dividend growth and reasonable capital appreciation over time. CHRW’s 2.5% yield isn’t very exciting for retired dividend investors, but the company’s long-term growth prospects get my attention.

 

While margins can fluctuate from quarter to quarter depending on a number of unpredictable factors, I expect the company’s shipping volumes and network value to continue growing over time.

 

As this plays out and the company continues to expand its number of services and route locations, C.H. Robinson should continue strengthening its moat and enjoy rising cash flows.

 

For dividend growth investors looking for quality at a reasonable price, C.H. Robinson could be a company to consider for their portfolios.