When it comes to steady dividend growers, often the best choice can often be a seemingly dull company – one that flies under the radar, yet grows steadily over decades.
Many times, it’s precisely boring companies that end up becoming dividend aristocrats, which are S&P 500 companies that reward long-term income investors with over a quarter century of consecutive payout growth.
Investors can view research on the dividend aristocrats here.
While Carlisle Companies (CSL) is not quite big enough to be classified as a dividend aristocrat, it has more than proven itself with 40 consecutive years of dividend increases.
Let’s take a closer look to learn if Carlisle, in addition to being one of the most dividend-friendly companies in America, represents an excellent, and potentially overlooked, long-term dividend growth investment for our Top 20 Dividend Stocks portfolio.
Founded in 1917 in Charlotte, North Carolina, Carlisle Companies is an industrial conglomerate that has made a name for itself serving various niche industries within the construction, transportation, aerospace, and food services markets:
Construction Materials (56% of 2016 sales): Rubber and thermoplastic roofing systems for non-residential buildings, foam insulation, HVAC air and moisture sealants.
Interconnect Technologies (23%): cables, wires, and connections systems for the aerospace, medical, defense electronics, test and measurement equipment, and other industrial markets.
Fluid Technologies (7%): liquid finishing equipment for the automotive, automotive refinishing, aerospace, agriculture, construction, marine, and rail industries.
Brake & Friction (7%): braking systems for the construction, agriculture, mining, aircraft, heavy truck, and performance racing markets.
Food Service Products (7%): cookware, catering equipment, fiberglass and composite material trays and dishes, industrial brooms, brushes, mops, and rotary brushes for commercial and noncommercial foodservice operators and sanitary maintenance industries.
As you can see, Construction Materials is by far Carlisle’s largest and highest margin business unit, making up the vast majority of its adjusted earnings in the past year.
|Business Segment||2016 Revenue||2016 Adjusted EBIT||% Of Sales||% Of Adjusted EBIT|
|Construction Materials||$2.05 billion||$431 million||55.8%||73.9%|
|Interconnect Technologies||$835 million||$144 million||22.7%||24.8%|
|Fluid Technologies||$269 million||$33 million||7.3%||5.7%|
|Brake & Friction||$269 million||$6 million||7.3%||1.0%|
|Food Service||$250 million||$32 million||6.8%||5.4%|
|Total||$3.68 billion||$583 million||100%||100%|
Source: Earning Release
By geography, roughly 75% of Carlisle’s revenue is derived in North America.
What’s important to note about Carlisle Companies is how impressive its growth has been despite the global industrial recession that has been going on for the last several years (due to crashing oil and commodity prices reducing demand from the mining and energy sectors).
In fact, in 2016, a year when many industrial companies were struggling with negative sales growth, Carlisle was able to generate decent to excellent growth in four of its five business segments, resulting in a 4% increase in revenue.
This is a function of the company’s strong presence in niche industries where it has a strong moat, courtesy of its trusted brands such as Binks, DeVilbiss, Ransburg, BGK, Hawk, Wellman, and Velvetouch.
Carlisle has grown to be one of the largest and most trusted providers in its respective industries thanks to management’s excellent and disciplined track record of small, bolt-on acquisitions.
Specifically, Carlisle avoids making large and splashy acquisitions, choosing to instead acquire the best names in its highly fragmented niche industries. The company then works steadily to streamline its supply chains and boost margins over time.
As you can see below, while Carlisle may be far from one of the larger industrial conglomerates, the company has managed to leverage its expertise in its niches into above average margins and returns on shareholder capital.
Perhaps much of the company’s success should be attributed to the Carlisle Operating System (COS), which management began implementing in 2008.
COS is a manufacturing and strategy system rooted in lean six sigma principles and intended to drive continuous operational improvements. Carlisle’s operating margins are around 50% higher than they were prior to the financial crisis, underscoring the effectiveness of COS.
|Company||Operating Margin||Net Margin||FCF Margin||Return On Assets||Return On Equity||Return On Invested Capital|
Carlisle’s unique corporate culture, in which management acquires only very well run and highly profitable companies, and then allows their pre-existing management teams to remain in place and continue running operations, is almost reminiscent of Berkshire Hathaway’s operations (see analysis on all of Buffett’s dividend stocks here).
This creates an entrepreneurial culture that allows Carlisle to be more nimble than many of its larger competitors while better serving its diverse client base.
As we’ll soon see, one of the biggest reasons for owning Carlisle is its highly effective corporate culture, which has proven to be exceptionally shareholder friendly, especially when it comes to long-term wealth creation (CSL’s stock has nearly doubled the market’s annualized return since 1995) and dividend growth.
Like most industrial companies, Carlisle’s business can be cyclical and tied to the health of the global economy (especially non-residential construction for its Construction Materials segment)
For example, Carlisle’s brakes & friction division has been struggling for years due to slowing economic growth in China. The resulting commodity crash from China’s slowing growth has decimated the demand for new industrial mining equipment, for example.
In addition, because Carlisle does business overseas (25% of sales are international), it has exposure to currency risk, specifically the strong dollar.
Since 2014, the dollar has risen about 25% against most other major currencies, creating a headwind for reported sales, earnings, and cash flow growth.
While no one knows where the dollar goes from here, continued strengthening would only serve to make Carlisle’s reported results look worse. However, this issue seems unlikely to threaten the company’s long-term earnings power.
Perhaps a bigger issue is Carlisle’s ability to continue finding highly profitable, reasonably priced, and large enough acquisition targets to continue its expansion.
While profitable growth is good, Carlisle could struggle to continue expanding without sacrificing some of the juicy operating margin the company enjoys today, which we previously saw is well above the industry’s average.
An acquisitive growth strategy also poses execution risk, especially for a conglomerate that reaches into so many different markets. Management could struggle to stay on top of everything as the number of moving parts increases within the company.
For now, management has certainly earned the benefit of the doubt, and Carlisle’s relatively small size compared to most industrial conglomerates suggests that opportunities for continued profitable growth outweigh the risks.
Dividend Safety Analysis: Carlisle Companies
We analyze 25+ years of dividend data and 10+ years of fundamental data to understand the safety and growth prospects of a dividend.
Our Dividend Safety Score answers the question, “Is the current dividend payment safe?” We look at some of the most important financial 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 real-time track record has been, and how to use them for your portfolio here.
Carlisle Companies has a Dividend Safety Score of 92, meaning the company’s payout is not just rock solid, but also incredibly dependable.
That isn’t a surprise since Carlisle has one of the best track records of maintaining and growing its dividend of any U.S. company.
In fact, its most recent dividend increase of 18% was the 40th consecutive year of the company growing its payout to shareholders.
Carlisle would be a dividend aristocrat if the company was large enough to be in the S&P 500, and it is just 10 years short of achieving Dividend King status.
What explains Carlisle’s amazing dividend safety and consistency record?
First, management maintains a conservative dividend policy, always being careful to keep both the EPS and FCF payout ratios low.
As you can see below, Carlisle has generally kept its payout ratios below 30% most years.
These low payout ratios ensure that, even in the event of a major downturn in the industries in which it operates, there will always be plenty of excess earnings and cash flow to keep the dividend secure and growing.
While Carlisle’s sales declined by 23% in 2009, the company’s earnings before interest and taxes (EBIT) actually grew 11%. Free cash flow per share nearly doubled in 2009 as well. Despite its cyclicality, management’s cost controls were clearly superb, providing an extra layer of insulation for the dividend.
Another protective factor for the dividend is Carlisle’s pristine balance sheet. Companies will always pay their debt obligations before paying dividends. This is important to acknowledge because of the cyclical and capital intensive nature of Carlisle’s industries.
However, as you can see, Carlisle’s management has wisely chosen to avoid taking on too much debt. In fact, the current cash on the balance sheet is enough to pay for nearly 5 years of the last 12 month’s dividends.
When we compare the company’s debt levels to its industry peers, we can see that Carlisle runs a very debt lean business model – one with very low leverage and debt/capital ratios, and very high current and interest coverage ratios.
That explains the solid investment grade credit rating and helps to ensure the company is able to access low cost borrowing when it chooses to.
|Company||Debt / EBITDA||EBITDA / Interest||Debt / Capital||Current Ratio||S&P Credit Rating|
Overall, Carlisle’s dividend payment is one of the safest in the market. The company’s low payout ratios, excellent cost controls, and conservative financial leverage make all result in an extremely safe dividend.
Dividend Growth Analysis
Our Dividend 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.
Carlisle Companies has a Dividend Growth Score of 87, indicating that investors can expect great things from this dividend growth powerhouse going forward.
That’s not a surprise given that the company has been accelerating its dividend growth rate over time. As you can see, annual dividend growth has increased from 9% over the last two decades to 15.7% annually over the last three years.
While Carlisle’s 1.3% dividend yield prevents it from being a current income play, the company has a number of growth opportunities to capitalize on in the coming years.
When combined with Carlisle’s low payout ratios, continued double-digit dividend growth wouldn’t surprise me.
Shares of Carlisle trade at a forward P/E multiple of 17.5 (about in line with the S&P 500’s forward P/E multiple) and offer a dividend yield of 1.3%, which is in line with the stock’s 13-year median dividend yield, according to Gurufocus.
It’s hard to make a compelling case for Carlisle’s valuation right now, and its relatively low dividend yield means much of the stock’s total return needs to come from earnings growth.
I would get more interested in the stock during the market’s next selloff, especially if there are concerns over future economic growth (a stock like CSL would likely be hit particularly hard).
Closing Thoughts on Carlisle Companies
With one of the most impressive and consistent long-term growth records, especially regarding its dividend, Carlisle Companies is one of the more undercover high quality dividend stocks in the market.
It’s unique, conservative, and shareholder-friendly corporate culture makes it a truly excellent business to keep an eye on. However, a lower share price would present a more attractive opportunity for dividend growth investors to consider. For now, Carlisle will remain on my watch list.
Thank you for covering this company. I opened a small position about 9 months ago. I’m not living on dividends yet, so these dividend growers like CSL are right in my sweet spot.
One thing I worry about with serial acquirers is whether or not they’ve got a good handle on the accounting issues. I believe many noted short sellers emphasize companies where there have been a lot of acquisitions on the theory that they will not properly account for good will and create the need for a restatement. As you know, even with the best outside auditors, management still owns their financials and is ultimately responsible.
Good morning Brian,
I would like to thank you for your excellent articles & newsletter. I look forward to starting each Saturday reading your thorough & cogent analysis of different companies. I find your the information to be very helpful in making informed investment decisions. Keep up the good work!
Thanks for a great review of this company.
I am having a bit of difficulty understanding your decision to wait for a downturn in industrial activity to revisit consideration of the stock as an acquisition.
It seems to me that the USA market is looking at a recovery in commercial activity exclusive of the oil sector. Such a recovery would increase the earnings of the company and at the same PE multiple, the price of the stock.
By my calculation, if dividends increased at a rate of 15% per year the yield would rise to 3.08% by 2023 if the price per share did not change. That is about the current yield of GE, another industrial conglomerate.
It seems to me there would be a dividend opportunity cost to consider for the first six years as what could be received is not. This would be a depreciating cost as the difference between the comparable rate, and the achieved rate would diminish with the passage of time.
Is the strategy to buy now and bet on the continued high rate of dividend increases? Holding the stock for ten or fifteen years at the current rate of increase would create an above average rate of return. In ten years it would yield 5.66% (at today’s cost) by my calculations.
If this is the strategy of your recommendation, what method would you use to calculate the share price at which to being an acquisition?
Thanks again for the great articles. They have been most enlightening and have resulted in a stronger portfolio.
You mention waiting for lower price. Not sure if you wrote that before or after yesterdays $3.41 drop to $105.
Can you please clarify at what price zone you think might represent a better opportunistic entry ?