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Pentair: Dividend Aristocrat Is Not Attractive

Jun. 09, 2020 9:25 AM ETPentair plc (PNR)
Vasily Zyryanov profile picture
Vasily Zyryanov


  • PNR is a Dividend Aristocrat with 44 consecutive years of dividend increases.
  • Because of low capital intensity, the company has copious annual free cash flow, which more than adequately covers the dividend.
  • On a negative side, PNR is richly valued, while the dividend yield is meager.
  • For now, I am not a buyer.

Pentair plc (NYSE:PNR) is a London-based company that provides water solutions both to consumer and industrial markets. PNR is considered to be a Dividend Aristocrat, as it has been increasing dividend payout for more than 44 consecutive years. However, I would not say PNR is a screaming 'Buy Immediately' for income-oriented investors even despite its relatively strong organic free cash flow to equity and anticipated mid-to-high-single-digit sales growth in 2021-2023. Let's proceed to the details to figure out why.

The top line

For a reader who is perhaps considering going long PNR, it is essential to understand that in the past, it had undergone complex portfolio recalibration, which is fully reflected in its revenue growth dynamics and equity changes.

A reader can notice similar bumpy revenue and equity changes in the cases of energy companies I cover: Hess (HES), Marathon Oil (MRO), and Murphy Oil (MUR). The steep declines in their revenues were caused by divestments of segments and global portfolio recalibration, as the oil players exited a few jurisdictions they considered no longer attractive.

PNR ended FY 2013 with $6.2 billion in shareholder equity, the amount 4.3x higher than it was in March 2020. Between 2011 and 2020, revenue fluctuated, touching $7 billion in 2014 and then retreating to $2.97 billion (from FY 2017 to FY 2019 sales had barely changed). Debt/Equity also wavered, going from 45.7% in 2013 to around 77% in the most recent quarter. The silver lining here is perhaps a year-long EPS growth trend and positive Free Cash Flow to Equity, which had been always generally in-line with earnings even despite sales volatility, and adequately covered annual dividends.

But what precisely led to such extreme fluctuations in the net worth? First and foremost, it was not a pure water treatment company. In 2016, it announced separation into two standalone

This article was written by

Vasily Zyryanov profile picture
Vasily Zyryanov is an individual investor and writer.He uses various techniques to find both relatively underpriced equities with strong upside potential and relatively overappreciated companies that have inflated valuation for a reason.In his research, he pays much attention to the energy sector (oil & gas supermajors, mid-cap, and small-cap exploration & production companies, the oilfield services firms), while he also covers a plethora of other industries from mining and chemicals to luxury bellwethers.He firmly believes that apart from simple profit and sales analysis, a meticulous investor must assess Free Cash Flow and Return on Capital to gain deeper insights and avoid sophomoric conclusions.While he favors underappreciated and misunderstood equities, he also acknowledges that some growth stocks do deserve their premium valuation, and its an investor's primary goal to delve deeper and uncover if the market's current opinion is correct or not.

Analyst’s Disclosure: I/we 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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