Looking at NDSN’s return on invested capital reveals the high quality level of the company’s operations. We can see that the business has generated double-digit returns every year since 2009. Companies with high returns on capital like NDSN are able to compound their earnings (and dividends) at a faster rate than other businesses.
Source: Simply Safe Dividends
If it weren’t for NDSN’s fantastic free cash flow generation, its balance sheet would be a concern. The company only has $50 million in cash on hand compared to over $1.1 billion of debt. However, its free cash flow easily covers its dividend and interest payments, leaving plenty left over for acquisitions. NDSN also has $200 million in
Source: Simply Safe Dividends
Overall, NDSN’s dividend is extremely safe. The company has low payout ratios, generates a lot of free cash flow, earns high returns on capital, operates in a stable industry, and has proven its commitment to the dividend with over 50 straight years of dividend growth.
Dividend Growth Score
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.
NDSN’s dividend Growth Score of 84 is excellent and suggests that the company can continue delivering very strong dividend growth. NDSN has increased its dividend for 52 consecutive years, which is the 14th longest growth streak among U.S. public companies and puts NDSN on the list of dividend kings, which consists of companies that have raised their dividends for at least 50 consecutive years.
Over its last 10 fiscal years, NDSN’s dividend has compounded by 10.8% per year and accelerating to an 18% annual growth rate over the last five fiscal years. Going forward, we expect NDSN’s long-term dividend growth rate to be at least 10% per year, although growth could be somewhat lower over the next year due to macroeconomic headwinds.
Source: Simply Safe Dividends
Valuation
Nordson Corporation (NASDAQ:NDSN) trades at 15x forward earnings and has a dividend yield of 1.7%, which is higher than its five year average dividend yield of 1%.
While currency headwinds and sluggish activity in many of NDSN’s cyclical end markets could persist for at least several more quarters, we don’t believe they impair the company’s long-term earnings power.
We still think this is a business with upper-single digit earnings growth potential given its relatively small revenue base ($1.7 billion), presence in 30+ countries, exposure to practically every end market, and constant stream of new products that further expand its addressable markets.
With the stock selling off over 20% during the past year, NDSN appears to be very reasonably priced and looks like it has at least 10% annual total return potential going forward.
Conclusion
NDSN is a boring business that doesn’t get much attention from investors. While it is dealing with several macroeconomic headwinds today, we believe NDSN will remain a powerhouse in the growing adhesives dispensing market for many years to come. NDSN’s large installed base, customer diversification, new product investments, and switching costs all serve as enduring competitive advantages and remind us of some of our favorite blue chip dividend stocks. With a very reasonable valuation multiple and potential for strong earnings growth over the next decade, NDSN is a dividend growth stock to watch closely.
Disclosure: None
