Cintas Corporation (NASDAQ:CTAS) is one of the highest scoring dividend stocks in our database for Dividend Safety (98) and Dividend Growth (99). The company has proven to be an extremely durable business with roots dating back nearly 90 years, and it has rewarded its shareholders with higher dividend payments for 32 consecutive years.
This is really one of the most consistent sales and earnings growers around, and it operates in a very slow-changing industry where it maintains leading market share. At the right price, we would certainly considering owning CTAS in our Top 20 Dividend Stocks portfolio.
Among hedge funds and other institutional investors tracked by Insider Monkey, 27 reported long positions in CTAS as of the end of September, versus 28 funds a quarter earlier. However, despite the low level of popularity, these funds amassed 11% of the company. First Eagle Investment Management held some 8.22 million shares of the company at the end of the third quarter, followed by Cliff Asness’ AQR Capital Management with a stake of 1.57 million shares.
Business Overview
CTAS started out as a laundry service for businesses during the Great Depression and has grown to become the largest provider of uniform programs in North America. As the company has grown, it has added facility services, first aid and safety services, entrance mats, restroom supplies, document management, fire protection, and more to its offerings.
Today, CTAS serves over one million business customers and clothes more than five million workers every day in North America. Approximately 70% of its customers are in the service-providing sector of the economy, and the remaining 30% are in goods-producing industries such as oil, gas, coal, construction, and manufacturing.
Business Analysis
In some ways, CTAS’s business is comparable to a garbage collection company. The business provides each worker with enough uniforms for two weeks. One clean set is for his current workweek, while the other is being laundered and repaired by CTAS.
CTAS will send a rep to the customer’s facility to pick up worn garments and drop off each worker’s clean uniforms for the next week.
It doesn’t take a genius to do laundry, so this commodity business is all about efficiency and being the low cost provider in a particular area (friendly service reps help, too).
With weekly stops made at every customer, route density is the best way to achieve lower costs than competitors because the cost of transportation (i.e. truck trips) can be spread across numerous customers. To accomplish this, CTAS has over 350 distribution facilities and more than 8,000 local delivery routes. Some customers prefer or need to do business with larger players that have more of a nationwide reach, and being closer to customers also results in better service because delivery times are shorter.
Smaller competitors will have miniscule margins if they try to compete in one of CTAS’s established areas because their transportation and operating costs are higher. They would also have to disrupt long-standing relationships that CTAS’s reps have with each customer, although we view that as a smaller competitive advantage. On the other hand, CTAS has the luxury of acquiring these companies to gain new geographies and increase its network density in existing regions, realizing meaningful cost synergies for the acquired businesses.
Once CTAS has a local area locked down for business, it can work on increasing its amount of sales with each customer by offering new products and services such as restroom supplies, document management, and tile cleaning. This strategy reminded us of another dividend aristocrat’s approach – Ecolab’s “Circle the Customer” business model. By offering a wider range off products and services to its customers, CTAS can increase the productivity of its reps, lower its customers’ costs, and create stickier customer relationships.
While it is very competitive and sensitive to price, the rental uniform market has a very slow pace of change and provides an essential service – we don’t believe the majority businesses will start doing their employees’ laundry in-house anytime soon. Furthermore, many of the industries in need of rental uniforms experience high employee turnover, which drums up even more business for companies like CTAS.
These factors have created a relatively stable competitive environment that has helped CTAS gradually grow in size over the decades and give us greater confidence in the company’s long-term relevance. With less than 10% share in a market greater than $40 billion in size, CTAS has plenty of room for growth. We also like the company’s diversification in that no customer accounts for over 1% of its total sales and no end market is greater than 10% of revenue.
