Johnson Controls: A Superstar Dividend Payer

Dividend Analysis - Johnson Controls Inc (NYSE:JCI)

The S&P 500 Dividend Aristocrat which I would like to evaluate today is Johnson Controls Inc (JCI), which trades on the NYSE.

Company Profile:

From Yahoo Finance

Johnson Controls, Inc. is an interior experience, building efficiency, and power solutions company. It operates in three segments: Building Efficiency, Automotive Experience, and Power Solutions. Building Efficiency segment engages in the design, production, and installation of control systems that monitor, automate, and integrate building operating equipment and conditions. Automotive Experience segment designs and manufactures automotive interior systems, including seating systems and components; cockpit systems, including instrument clusters, information displays, and body controllers; overhead systems, including headliners and electronic convenience features; floor consoles; and door systems. Power solutions segment produces lead-acid batteries for the automotive original equipment vehicle manufacturers and the battery aftermarket.

JCI has a market capitalization of $23.35B, and employs 136,000 people.

Company Fundamentals:

Staying with my normal plan, let’s start with a look at the return on invested capital. Management has been nothing but consistent on this front. They have consistently, and steadily delivered an ROIC in the 11%-12% range. The 5-year average ROIC is 10.8%.

Its return on equity is more of the same. And talk about consistency - both the 10-year average and the 5-year average are 15.06%!

Its equity growth rate has been superb over the last 10 years. And dare I say, consistently superior! The 9 year average is 16.08%. The 5 year average is 17.57%. The 3 year average is 17.13% and last year’s equity growth rate was 19.61%.

And its earnings per share growth rate has followed in step with equity growth rate. The 9 year average is 16.65%; the 5 year average is 15.16%; and last year’s EPS growth rate was 23.53%.

Last but not least is the sales growth rate. And once again, nice consistency with JCI delivering 11%-12% sales growth.

From the fundamentals, this company looks fantastic. Let’s see how the dividend fundamentals look.

Dividend Fundamentals:

Johnson Controls Inc is currently sporting a 1.11% dividend yield. This is low in comparison with the dividend yield available from the S&P500 Index, and the DJIA.

Now, something I like to see is solid dividend growth. And JCI has delivered to the tune of 11.40% over the 10 year period. Over 5 years, it is 13.48%. Last year’s dividend growth rate was 12%, which is a solid growth rate, and exactly what I like to see.

The dividend payout ratio is low, currently sitting at 20.51%. In fact, it has been steadily decreasing over the 10-year period from a high of 36.29%. Once again, this is a huge plus.

And cash flow to pay for these dividends? Over the 10-year period, its cash flow growth rate has been 9.94%. And, it has remained very steady in that 9%-10% range. Last year’s cash flow growth rate was 17.18%.

Like the company fundamentals, this stock is a winner. Now let’s see how the valuations look.

Valuation Models:

From a yield perspective, this stock is expensive. The 5-year average high dividend yield is 1.96%. And for the last 3 years, the high dividend yield has been 1.89%, 1.9% and 1.87% respectively. So, it is really consistent. Unfortunately, JCI currently has a 1.11% dividend yield. For my model price, I will demand a yield of 1.96% which makes my model price $67.35. At the current price of $118.85, that means a premium of 76.47%.

And Graham would agree. The Graham number delivers a price of $71.39 which is a premium of 66.47%.

For my discounted present value, I used the following inputs:

A future P/E of 12.93 (this is the 5 year average P/E and is more conservative than the 10 year average and the current P/E).

A future EPS growth rate of 14% (I had estimated a future growth rate of 16.08%, however the analysts have forecast 14%, so I am using their more conservative estimate).

A dividend yield of 1.96% (5 year average high dividend yield).

A future dividend growth of 12% (last year’s dividend growth rate which is more conservative than the 5 year average).

With these inputs, the model price is $96.83. But that price doesn’t make sense because in order to get my dividend yield of 1.96%, I should not be willing to pay more than $67.35.

Check my calculations for JCI.

Here is the one year stock price chart:

click to enlarge,

This stock has been an absolute superstar! In September of 2006, you could have purchased this stock for just under $70. That is right around my dividend yield model price!

Conclusion:

My analysis shows that JCI is a superstar dividend payer. Unfortunately, its non-stop price climb has put this one way out of reach for a reasonable price.

But I will definitely add this to my watch list. Patience young grasshopper, as good things come to those who wait.

Full Disclosure: I do not own any shares in JCI (yet!).