Badger Meter: Undervalued Divi – GuruFocus.com
Dividend champions come in all sizes, though most investors are likely familiar with the big names that have been raising dividends for decades.
Badger Meter Inc. (BMI, Financial).
Company History and Earnings History
Badger Meter manufactures the meters and valves used to measure and control the flow of air, gases and liquids. The company derives most of its revenue from municipal water utilities, but Badger Meter’s products are used in end markets such as chemicals, HVAC, oil and gas. The $2.4 billion company generates annual revenue of $505 million.
The company announced its first quarter results on April 19. Revenue rose 12.4% to $132.4 million, while earnings per share of 49 cents compared favorably with 47 cents a year earlier.
The water distribution business was quite strong, with revenues up 15% compared to the previous year. This growth was driven by a variety of factors, including strong order activity, backlog conversion and acquisitions. The company is experiencing supply chain disruptions, which has been driving flat flow instrumentation product sales year over year.
Inflationary pressures also contributed to a 360 basis point decline in operating margin, although this was compared to a new high in the first quarter of 2021. Rising input costs impacted on the bottom line, but Badger Meter expects to offset these expenses with higher realized prices. Switching costs are high in this industry and the company’s products are considered the best in the industry, so rising prices are not expected to lower demand. This is supported by Badger Meter seeing its backlog hit a new all-time high during the quarter.
Badger Meter has achieved very strong long-term results, driving a compound annual growth rate of almost 9% for earnings per share since 2012. This is largely due to the company’s advanced products. For example, the company’s Beacon and Orion products combine to allow water utilities to monitor operations and detect water leaks as they occur. These products have seen increased demand among customers as they can save utilities on cost.
Wall Street analysts polled by Yahoo Finance forecast earnings per share of $2.18 for 2022, which would mark an increase of nearly 5% from last year’s record high.
Ranking against peers
Badger Meter has leveraged its cutting-edge technology into strong fundamentals. The company is currently operating at a very high level on a number of metrics, both relative to its own historical performance and that of the industry in general.
Badger Meter receives a 10 out of 10 from GuruFocus for financial strength, as it performs well almost everywhere. For starters, the company is debt-free, putting its cash-to-debt ratio above 99.9% of its industry group. For this reason, interest coverage is plentiful and the Altman Z-Score also ranks very safe as the lack of debt should prevent the company from going bankrupt. The Piotroski F-Score is solid, reflecting the financial strength of Badger Meter. Finally, the company’s return on invested capital of 15.3% is nearly three times its weighted average cost of capital of 5.5%.
Badger Meter’s profitability ranking is also a perfect 10 out of 10.
The company is above the majority of its peers in all categories. Operating margin, return on equity, return on assets and return on invested capital exceed at least 80% of the competition. Almost all scores are near the peak of the company’s 10-year historical performance. It’s not just about giving up the competition; Badger Meter surpasses its own historic record.
Badger Meter receives another high score for growth, this time 9 out of 10. The only area where the company has been weak compared to its peers is three-year revenue growth, although this is in the middle of the peloton. Almost everywhere else, the company is two-thirds to three-quarters ahead of the competition. Earnings per share over three years without non-recurring items is particularly solid.
With high ratings in almost every area, Badger Meter receives a GF score of 94 out of 100. Based on fundamentals, the company’s business appears to be in good shape, which should help support the dividend.
Dividend safety analysis
Badger Meter’s dividend yield is rather low at 1%. The stock has rarely offered much return, with an average return of just 1.3% since 2012. However, this is more about a rise in share price than a matter of commitment to increase the dividend.
The company’s dividend has a CAGR of 9.7% over the past decade, but this growth rate is accelerating to nearly 12% over the past five years. This includes an 11.1% increase for the September 10, 2021 payout date, which extended the company’s dividend growth streak to 29 years. Shareholders can expect the next dividend increase to be announced towards the end of August if Badger Meter sticks to its usual schedule.
Badger Meter has managed aggressive dividend increases over the past decade as the company’s business continues to expand. Despite average double-digit increases over the past 10 years, payout ratios are within a narrow range.
The company paid out 76 cents in dividends per share in 2021 while earning $2.08 for a payout ratio of 37%. Shareholders should see dividends of at least 80 cents per share this year. According to analysts’ estimates, the projected payout ratio is also 37%. Both numbers are very close to the 10-year average payout ratio of 39% for the company.
Using free cash flow as the target for dividend safety shows that distributions are well covered. Over the past year, Badger Meter has paid out $23 million in dividends while generating free cash flow of $60 million for a payout ratio of 38%. That’s above the average free cash flow ratio of 27% since 2018, but still within a very safe range.
Since the company currently has no long-term debt, all available capital can be used to cover dividend payments. This should provide an additional layer of security to the Badger Meter dividend.
Badger Meter had a tough year with a large portion of the market.
The stock is down more than 23% since the start of the year, although this has led to an improvement in the valuation of Badger Meter.
The GF value chart, which uses a variety of measures to determine fair value, shows that the stock is undervalued.
Badger Meter closed Friday at $81.76. The stock has a GF value of $92.35, which gives a GF price-to-value ratio of 0.89. Reaching GF value would mean a 13% gain in stock price.
Badger Meter is a small company, but a leader in its industry. The company has a portfolio of advanced products which are highly demanded by customers. This technical advantage allowed Badger Meter to increase its dividend for a long time. And with reasonable payout ratios and no long-term debt, the company’s dividend is poised to continue growing at a rapid pace.
At the same time, shares of Badger Meter are trading at a price below its intrinsic value, not seen since late 2020. For investors looking for an entry point in the name, it could now prove be an opportunity to buy shares of the company at a higher price. reasonable valuation.