One of the most endearing traits of so-called “boring stocks” is their predictability. These oft-forgotten stocks provide stability in otherwise volatile markets, whether through diversified trades or an ever-increasing dividend. As investors continue to rebound in a more volatile market seemingly pitted against growth and tech stocks, attention appears to be turning to more stable alternatives, such as the more recent S&P500 index member – and now, Dividend Aristocrat – Nordson (NDSN -0.15% ).
With its well-diversified end markets and 25 consecutive years of annual dividend increases, Nordson’s unique business has captured the attention of people in S&P Global. Let’s take a closer look at why individual investors should also consider paying attention to the stock.
Nordson is experiencing growth on two fronts
Founded in 1956, Ohio-based Nordson operates in two business segments, Industrial Precision Solutions (IPS) and Advanced Technology Solutions (ATS), providing precision technology products to its customers. Through these segments, Nordson sells to five key end markets:
- Electronic: semiconductor and wafer level packaging, printed circuit boards, electronic component assembly, etc.
- Non-durable consumer goods: closing boxes, diapers, food packaging, labeling containers and bottles, etc.
- Medical: balloons, extrusions, catheters, fittings, connectors, fluid transfer components, etc.
- Industrial: heavy machinery, rigid containers, energy, aerospace, chemicals and defence.
- Remaining markets: automotive, durable consumer goods and animal health.
Electronics is Nordson’s largest end market, accounting for 29% of sales, with the remaining markets being the smallest, at 12%, highlighting its perfectly balanced operations. Similarly, IPS accounts for 53% of sales, while ATS accounts for 47%.
The further diversification of Nordson’s operations is that only a third of its total sales come from the United States, with Asia accounting for another third of sales and Europe generating 26%.
Even better for investors, 55% of Nordson’s sales come from parts and consumables, creating a broad recurring revenue base for the company.
While the company has only averaged 6% sales growth over the past five years, it reported 16% year-over-year revenue growth for the first quarter of 2022. This surprising sales surge came from its electronics and medical end markets, which grew by more than 40% and double digits, respectively.
While the vast majority of this sales growth is organic in the first quarter, management expects to add an additional $500 million in annual sales through mergers and acquisitions (M&A) over the next several years. These new M&A sales would bring a further 15% increase in revenue for Nordson, which generated nearly $2.4 billion in sales in 2021.
Kicking off this M&A frenzy, Nordson acquired NDC Technologies in 2021 for $180 million, adding $90 million in sales and $15 million in earnings before interest, taxes, depreciation, and amortization (EBITDA).
Thanks to this acquisition and strong organic growth, management expects revenue growth of 7% to 10% and earnings per share growth of 14% to 18% for 2022.
Control of dividend growth
With its 20% profit margin, Nordson’s consistent and strong bottom line has allowed it to generate consistent free cash flow that has led to consistent dividends and dividend increases for 25 consecutive years. Although it passed the metrics needed to be named a Dividend Aristocrat, it was added to the S&P 500 in February, which sealed the final qualification criteria for the title.
Although its 0.9% dividend yield may not reveal high return potential to investors, Nordson has increased its dividend by an average of 15% per year over the past decade. For example, if you had bought stocks 10 years ago, you would now have a 4.1% return on your original cost.
Moreover, with a payout ratio of just 21%, Nordson could quadruple its dividend and still have cash, demonstrating how secure its ability to increase the dividend is. A company’s payout ratio takes its dividends paid for the year divided by its earnings per share and can be used to measure the health of its dividend. Dividend-growing stocks with a payout ratio below 50% are strong because they demonstrate a balance between returning cash to shareholders and future growth of the company.
Takeaway for investors
Historically, dividend-growing S&P 500 members with a payout ratio below 50% tend to outperform their index peers, which puts Nordson on my watch list.
Trading at 25x forward earnings, Nordson trades very close to the median price-earnings ratio of its new S&P 500 peers. However, I think its balance between organic growth and M&A growth, its margin massive 20% profit and its history of increasing dividends make it a great buy for long-term dividend growth investors.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.