2023-12-08 06:10:00 ET
Summary
- Carlisle Companies is a dividend aristocrat with a history of 47 consecutive annual dividend hikes and a low payout ratio.
- The company has transformed into a pure-play building products provider and aims to achieve $40 in adjusted EPS by 2030 through organic growth and enhanced margins.
- Despite short-term revenue challenges, CSL's solid balance sheet and attractive valuation suggest the potential for returns exceeding 14% per year.
Introduction
It's time to talk about Carlisle Companies ( CSL ) , a company I added to my portfolio this year.
On May 15, 2023, I initiated coverage, writing an article titled Carlisle: An Underappreciated Dividend Growth Stock . Since then, the stock has added roughly 40%. It is also up 40% in my portfolio, excluding dividends.
Not only is Carlisle a dividend aristocrat, but it is also a company with significant growth potential, secular tailwinds, and very ambitious plans, which it just outlined in its new Vision 2030 .
In this article, I will discuss my thoughts on the latest numbers and developments of the company and explain why I plan to continue buying CSL aggressively. I believe that it will continue to be one of the top-performing stocks in my portfolio for many years to come.
So, let's get to it!
A Dividend Aristocrat With High Growth Rates
Like most people, I like dividend aristocrats and dividend kings, companies that have hiked their dividends for at least 25 and 50 consecutive years, respectively.
However, I do not necessarily focus on these companies just because they are a part of these exclusive groups, as I do not care enough about consistent dividend growth.
While I do care a big deal about a company's ABILITY to hike dividends on a consistent basis, I don't mind it if the board decides to keep the dividend unchanged for reasons that may be tied to large M&A projects, economic uncertainty, or debt reduction.
Some of my best investments have had prolonged periods without dividend growth. This includes Deere & Company ( DE ), Canadian Pacific Kansas City ( CP ), and Public Storage ( PSA ) - among others.
Additionally, companies with very long dividend growth histories tend to have very mature business models that often come with subdued growth rates.
Carlisle is different.
Not only is Carlisle a dividend aristocrat, but it is also just three years away from potentially becoming a dividend king!
On August 3, the company hiked its dividend by 13% to $0.85 per share. This translates to a yield of 1.2%.
Sure, 1.2% is not a yield to write home about. But that's okay.
As I said, the company has a history of 47 consecutive annual dividend hikes. It has a payout ratio of less than 20% (that's very healthy), and its dividend five-year CAGR is 16%.
In other words, CSL combines dividend consistency with safety and growth.
That is very rare.
But wait, it gets better!
Over the past ten years alone, CSL has bought back roughly 24% of its shares, which has added to its total return.
Although its low yield may be annoying to some, we need to be aware that a company that still has a low yield after many years of aggressive dividend growth tends to come with a history of high capital gains.
Over the past ten years, CSL has returned 339%, beating the S&P 500 and the Vanguard Dividend Appreciation ETF (VIG) by a wide margin.
The reason I'm mentioning this is because Carlisle is very optimistic about its future.
Carlisle Has Plenty Of Growth Left
Carlisle has transformed itself from a diversified industrial company to a pure-play building products provider.
In 2017, the company generated 57% of its revenues from building products. Other revenues came from Interconnect Technologies, Food Service Products, Brake & Friction, and Fluid Technologies.
Back then, it had a 14% return on invested capital ("ROIC").
Nowadays, the company generates all of its revenues from building products with a >25% ROIC.
70% of its revenues come from construction materials. Weatherproofing technologies account for the remaining 30%.
It's also very beneficial that more than 60% of the company's sales are replacement and remodel sales, which means the "aftermarket" is a big deal for CSL.
Before we get to the company's just-announced 2030 outlook, it needs to be said that the company achieved its 2025 target of more than $15 billion in annual sales in 2022 - three years ahead of plan!
Now, the company is confident enough to share its 2030 targets with investors.
Six years from now, the company headquartered in Arizona aims to generate $40 in adjusted EPS. Currently, that number is $15.
It aims to achieve this by growing organic revenue by at least 5% per year. When adding higher margins, the company is upbeat about its ability to grow adjusted EPS by the mid-teens every year, hopefully resulting in $40 2030 EPS.
A big driver of its future growth is expected to be the Carlisle Operating System ("COS"). This system aims to enhance capital allocation, operational efficiencies, and automation.
Since the launch of Vision 2025, COS has contributed to savings worth 1% to 2% of sales while enhancing the company's OSHA injury rates.
Another big factor in the company's path to consistent growth is innovation.
Not only does Carlisle benefit from secular growth, like the need for insolation and the need to make buildings more energy efficient, but it also has increasingly better products.
As we can see below, the company aims to boost R&D spending to 3% of total sales. Currently, that number is below 1%. This is expected to lead to 25% of total revenues coming from new products.
According to CSL's Vision 2030 presentation, the International Energy Agency believes that green commercial buildings will grow at a low-to-mid double-digit CAGR through 2030, boosted by Federal and local regulations and building costs.
This is a $70 billion market of which Carlisle owns just a small part.
If the company achieves industry-beating growth, it could see a much higher market share down the road, especially if its higher R&D spending plans pay off.
Furthermore, the company's focus on margins has led to tremendous resilience, which also benefited consistent dividend growth.
Due to consistent margin improvements, the company was able to grow EBITDA even during times of lower revenues.
As we can see below, this happened during the pandemic and even during the Great Financial Crisis when the housing implosion could not keep CSL from reporting stable EBITDA.
This year, the company expects to maintain a 27% adjusted EBITDA margin despite an expected revenue decline from $5.5 billion in 2022 to $4.5 billion in 2023.
Speaking of lower revenues in 2023, in the third quarter, Carlisle Construction Materials reported revenues of $914 million, marking a 16% decline from the previous year.
This decrease was attributed to a $50 million destock, anticipated in challenging end markets influenced by higher interest rates, tighter lending conditions, and project delays.
Despite the decline, the adjusted EBITDA margin remained robust at 32%, reflecting pricing discipline, share retention, and positive price/cost dynamics.
Cost reductions were achieved through operational efficiencies supported by the Carlisle operating system.
Carlisle's Construction, Transportation, and Water Management segment experienced a 15% reduction in revenues, primarily driven by weakened residential demand and project delays.
However, the adjusted EBITDA margin saw a notable expansion of 890 basis points to reach 23.4%.
The company also enjoys a strong balance sheet. The company is expected to end this year with $1.8 billion in net debt. This would translate to less than 1.7x EBITDA.
It has an investment-grade BBB credit rating, which I expect to be boosted to BBB+ over the next two years.
Valuation
CSL shares continue to be attractively valued.
Based on the data in the chart below:
- CSL is trading at a blended P/E ratio of 19.1x.
- Going back 20 years, the normalized multiple is 17.7x earnings.
- This year, EPS is expected to fall by 26% after earnings more than doubled in 2022.
- Next year, EPS is expected to grow by 18%, followed by an expected growth rate of 13% in 2025.
- A return to its normalized valuation (meaning a lower multiple) would, technically speaking, result in an annual return of 10% through 2025.
- If the company were to maintain its 19x multiple (which, I believe, reflects its long-term potential), it could return 14% per year.
Over the past 20 years, CSL shares have returned 14.0% per year.
Hence, going forward, I expect CSL to continue returning 14.0% per year based on its above-average growth outlook.
Adding to that, $40 in 2030 EPS would indicate a $760 stock price (19x$40).
This would suggest a 14.7% annual return (excluding dividends).
Needless to say, economic headwinds could cause the stock to fall in the mid-term.
As a long-term investor, I am looking to add to my position on >10% corrections.
Takeaway
As a dividend aristocrat on the verge of becoming a king, CSL's 47-year dividend growth streak and conservative payout ratio set it apart.
Its transformation into a pure-play building products provider aligns with market trends, promising significant growth with secular tailwinds.
Meanwhile, its Vision 2030 outlines ambitious targets, with CSL aiming for $40 in adjusted EPS by 2030 through organic growth and enhanced margins. The Carlisle Operating System and a focus on innovation reinforce CSL's forward-thinking strategy.
Despite short-term revenue challenges, CSL's solid balance sheet and attractive valuation suggest the potential for returns exceeding 14% per year.
For further details see:
Carlisle Companies: A Dividend Aristocrat With A Realistic Path To >14% Annual Returns