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Summary

  • Ecolab’s sales increased 16% for the first quarter.
  • The company has grown revenue per share over 10% a year for the last decade.
  • Ecolab has paid dividends for 40 years without a reduction.
  • The company compares favorably to other Dividend Aristocrats.
  • Ecolab has increased its dividend for 22 consecutive years.

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Ecolab (NYSE:ECL) is the global leader in water, hygiene, and energy technologies and services that protect and clean. The $33 billion company provides safe food services, clean environment services, and operational efficiencies for customers in the food, healthcare, energy, hospitality, and industrial markets in over 170 countries throughout the world.

Current Events

Ecolab posted excellent first quarter results. The company managed to grow sales by 16% year over year. Ecolab's strong growth was driven by a 78% increase in sales in the company's Global Energy division. The increase in Global Energy revenue was due to integrating the recently acquired Champion Technologies. After 2014, the company will not continue to grow at such a rapid pace, barring unforeseen acquisitions.

Ecolab's operations are divided into 4 divisions. The Global Institutional division is responsible for the most operating profit of the 4 divisions, and is also the most profitable.

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Source: 2014 Q1 results

Acquisition adjusted fixed currency sales increased 5% for the twelve-month period ending in the first quarter. Growth was led by an increase of 8% (acquisition adjusted) in the Global Energy division. Strong growth in this division was driven by an increase in both the upstream and downstream energy markets.

First quarter acquisition adjusted sales growth for the Global Industrial and Global Institutional segments came in at 3% for each. Ecolab managed to grow operating income by 7% in both of these divisions. The company's ability to grow operating income faster than revenues points to a strong market position and pricing power.

Shareholder Return

Ecolab's current rapid growth from acquisitions is not likely to continue. The company has been a net issuer of shares since 2010 to fuel its expansion. The company's management has done well allocating capital; Ecolab has grown revenue per share over 10% through the last decade. Going forward, shareholders of Ecolab can expect a CAGR of between 6% and 11% from growth (5% to 10%) and dividends (1%).

Valuation

Ecolab appears to be overvalued based on its P/E ratio compared to its peers:

Ticker

Company

P/E

ECL

Ecolab Inc.

33.84

CHD

Church & Dwight Co. Inc.

25.1

SCL

Stepan Company

17.72

ZEP

Zep, Inc.

33.84

TIS

Orchids Paper Products Company

18.32

OBCI

Ocean Bio-Chem Inc.

16.76

Source: Finviz

However, the company has grown rapidly over the last decade, and is very likely to continue to do so. Excellent companies with high growth rates should trade at a higher multiple of earnings compared to their peers.

Consecutive Years of Dividend Increases

Ecolab has paid increasing dividends for 22 consecutive years. Further, the company has not reduced its dividend since 1974, a streak of 40 years. Businesses with the ability to continually increase dividends year after year are likely to have a strong competitive advantage.

Why it matters: The Dividend Aristocrats (stocks with 25-plus years of rising dividends) have outperformed the S&P 500 over the last 10 years by 2.88 percentage points per year.

Source: S&P 500 Dividend Aristocrats Factsheet, February 28 2014, page 2

Dividend Yield

Ecolab currently has a dividend yield of only 1%, ranking it at 106 out of 112 businesses with over 25 years of dividend payments without a reduction.

Why it Matters: Stocks with higher dividend yields have historically outperformed stocks with lower dividend yields. The highest-yielding quintile of stocks outperformed the lowest-yielding quintile by 1.76 percentage points per year from 1928 to 2013.

Source: Dividends: A Review of Historical Returns

Payout Ratio

Ecolab has a low payout ratio of only 29.10%. The company ranks at 26 out of 112 businesses based on this metric. Ecolab has ample room to raise its dividend faster than overall company growth for several years because of its low payout ratio.

Why it Matters: High-yield, low-payout ratio stocks outperformed high-yield, high-payout ratio stocks by 8.2 percentage points per year from 1990 to 2006.

Source: High Yield, Low Payout by Barefoot, Patel, & Yao, page 3

Long-Term Growth Rate

Ecolab compares very favorably to other businesses with over 25 years of dividend payments without a decrease. The company has grown revenue per share at over 10% for the last decade. It ranks at 4 out of 112 based on this metric.

Why it Matters: Growing dividend stocks have outperformed stocks with unchanging dividends by 2.4 percentage points per year from 1972 to 2013.

Source: Rising Dividends Fund, Oppenheimer, page 4

Long-Term Volatility

Ecolab has a fairly low long-term standard deviation of 23.69%. The company ranks at 31 out of 112 businesses with 25+ consecutive years without a dividend reduction.

Why it Matters: The S&P Low Volatility index outperformed the S&P 500 by 2 percentage points per year for the 20-year period ending September 30th, 2011.

Source: Low & Slow Could Win the Race, page 3

Conclusion

Ecolab compares favorably to other high quality dividend stocks using The 8 Rules of Dividend Investing. It ranks at 11 out of 112. The business is not in the Top 10 because of its low dividend yield. When the company's dividend yield rises (as valuation decreases), it will be a strong buy.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Ecolab: High Growth Dividend Aristocrat