Roper Applied sciences (ROP) is a member of the Dividend Aristocrat Index, counting 29 years of successive annual dividend hikes. Moreover, Roper reveals a outstanding observe document of development, each organically and thru its intensive acquisitions pipeline.
Primarily based on the corporate’s legendary dividend development observe document, pristine development pipeline, and a administration staff that has gained the Avenue’s love over time, I imagine that Roper’s valuation will stay wealthy transferring ahead.
That mentioned, because of the ever-present danger {that a} valuation compression may injury shareholder returns, I’m reluctant to allocate capital to the inventory. Consequently, I’m impartial on the inventory.
Whereas most corporations that characteristic such an prolonged dividend development observe document are often fairly mature, Roper continues to develop at a quite constant tempo. Thus, the inventory has attracted an prolonged shareholder base, comprising each conservative and dividend development traders.
That is evident by the truth that the inventory has constantly retained a steep premium. Any dips, traditionally, have been quickly taken benefit of by the market, retaining this pattern.
Roper Applied sciences focuses on manufacturing items reminiscent of medical and scientific imaging gear, materials evaluation gear for quite a lot of industrial purposes, and pumps, amongst different merchandise. The corporate’s Applied sciences division additionally develops software program options for the transportation, meals, healthcare, power, and water industries.
Q1-2022 Outcomes Had been Sturdy; Steering Elevated
In late April, Roper reported its Q1-2022 outcomes, posting one other quarter of wonderful efficiency. Quarterly revenues and adjusted EPS got here in at $1.53 billion and $3.77, suggesting a year-over-year achieve of 11% and 10%, respectively.
The corporate stepped into Fiscal 2022 on a excessive observe. Particularly, Roper posted 11% natural development. Progress was pushed by all-around energy throughout its portfolio of niche-leading companies. Moreover, outcomes have been powered by assertive momentum as a consequence of double-digit software program recurring income development amid vigorous product demand.
Assisted by its EBITDA development of 8% throughout Q1 and its web debt lower of roughly $3.6 billion, Roper diminished its web debt-to-EBITDA ratio to 1.9x from 3.1x on the finish of Fiscal 2021.
Roper continues to expertise decisive recurring income momentum in software program, elevated ranges of demand, document backlog ranges, and advantageous market situations.
Including its stability sheet energy and its intensive pipeline of high-quality acquisition prospects, Roper’s administration believes the corporate is well-placed for steady double-digit money circulation improvement.
Consequently, administration boosted its Fiscal 2022 steering, now anticipating attaining adjusted EPS between $15.50 and $15.75 (up from $15.25 to $15.55 beforehand) for the total yr.
Valuation is Too Excessive; Dividend is Too Low
Regardless of Roper’s extended and honored dividend development observe document, dividends stay solely a token of shareholders’ total-return prospects. The corporate’s most up-to-date dividend hike was by about 10% this previous November. For context, Roper’s 10-year dividend CAGR sits near an distinctive 17.7%.
That mentioned, with dividends being solely a snippet of earnings (the payout ratio stands at 16% based on the current annualized dividend per share and administration’s outlook), the inventory yields a tiny 0.6%.
The explanation for such a low yield apart from the corporate distributing a small portion of earnings is that shares have constantly traded at a premium. At present, shares are buying and selling at a (ahead) P/E of 24.8 primarily based on the inventory worth and the midpoint of administration’s Fiscal 2022 adjusted EPS estimate.
Whereas the inventory has corrected recently, it stays barely overvalued, in my opinion. Administration’s double-digit development steering might sound shiny, however there could possibly be extra room for the valuation to be compressed in a rising-rates setting – particularly contemplating that Roper has a considerable web debt place regardless of its current deleveraging.
Greater rates of interest following future refinances may squeeze profitability. Additional, assuming Roper rushes debt repayments to keep away from such a state of affairs, it might have much less capital to allocate to acquisitions within the medium time period. Thus, its development prospects going ahead might soften – only a danger to bear in mind.
Wall Avenue’s Tackle Roper Applied sciences
Turning to Wall Avenue, Roper Applied sciences has a Reasonable Purchase consensus score primarily based on 4 Buys, three Holds, and one Promote assigned up to now three months.
At $469.75, the typical Roper Applied sciences inventory projections recommend 21% upside potential.
Conclusion – Roper Could Not be Price Shopping for But
General, Roper Applied sciences showcases a number of qualities. These embrace main market positions within the area of interest markets it serves and high-quality, recurring money flows. The corporate’s newest outcomes exhibited sturdy second retention, whereas administration’s steering is actually encouraging.
Whereas the current correction within the inventory worth may seem like a fruitful shopping for alternative, shares may nonetheless be comparatively overvalued within the present rising-rates setting.
Additional, because of the inventory’s yield remaining at microscopic ranges, dividend returns wouldn’t have the ability to offset any losses from a decrease inventory worth if a valuation compression state of affairs have been to happen.
Nonetheless, Roper is prone to retain a robust shareholder base over the long run as a consequence of its hybrid shareholder attraction, together with drawing each dividend development and conservative traders. That is prone to maintain the inventory throughout market downturns and increase it additional throughout bull runs.
