Is the Dividend at Cintas Safe?

An important component of income investing is a portfolio that includes safe dividends, those that are unlikely to shrink or disappear. Recognizing when a dividend is safe and stable can be a challenge. Yet, certain metrics may offer clear signs for the investor looking to establish or boost such a portfolio. What do these metrics tell us about the quarterly dividend at Cintas Corp. (NASDAQ: CTAS | CTAS Price Prediction)?

The most recent payout from Cintas was $1.35 a share, and the yield is now about 0.9%. The next ex-dividend date is February 12. The current yield is less than that of such competitors as Aramark (NYSE: ARMK) and Sysco Corp. (NYSE: SYY) but greater than that of UniFirst Corp. (NYSE: UNF). It is also lower than the industry average of about 2.2%.

Dividend Aristocrat?

A Dividend Aristocrat?

One clear sign of whether a dividend is stable and safe is if the company is a Dividend Aristocrat. Those are companies in the S&P 500 that have not only paid a dividend consistently for 25 years but have increased their payouts every year as well. Cintas has a 40-year history of dividend hikes. That means it is a decade away from being a Dividend King, one of those companies whose dividends have risen annually for at least 50 years. (See the seven highest-yielding 2024 Dividend Kings to buy and hold forever.)

Other Valuation Metrics

What the metrics tell us

While being a Dividend Aristocrat is a good sign, other financial metrics provide additional insight.

The dividend payout ratio indicates how much of a company’s earnings it pays out as a dividend. It is a sign of how safe a company’s dividend is and how much room it has for future growth. The higher the ratio, the greater the risk. Income investors often look for a dividend payout ratio of less than 60%. Cintas easily hits that mark with a current dividend payout ratio of about 36%. That is less than the 39% industry average but higher than the company’s mean dividend payout ratio of 28% over the past decade.

A look at free cash flow reveals whether the company has the funds required for its payout, as well as for share repurchases or even paying down debt or making acquisitions. Income investors prefer growing free cash flows. That was the case at Cintas from nearly $190.5 million in 2016 to around $1.3 billion in 2022. However, the figure drooped a bit last year.

Return on invested capital is a measure of how well a company allocates its capital to profitable projects or investments. Again, the thing to look for is stability, specifically a double-digit ROIC over many years. At Cintas, the current ROIC is a bit less than 20%. It has been above 10% since 2014.

Operating margin is a measure of the percentage of revenue a company keeps as operating profit. Here too the preference is for a stable double-digit percentage increase. The current figure is shy of 20% and the highest it has been since at least 2010. The figure has grown in most quarters since then.

A look at sales growth offers a clue to the volatility or cyclical nature of the business. Steady, moderate growth, say 3% to 7%, is often considered ideal. Except for a minor retreat during the COVID-19 pandemic, revenue at Cintas has grown since 2014, when it was a little over $4 billion, to last year’s $9 billion or so. (See which five blue chip dividend stocks make up 75% of Warren Buffett’s portfolio.)

Probably the most popular valuation metric is the price-to-earnings (PE) ratio. This indicates whether a stock is expensive or cheap at its current market price, compared to the broader market or to competitors. Cintas has a trailing PE ratio of more than 44, which is higher than the industry average of around 18%. Note that Cintas’s forward PE is over 38. That compares with a broad historical benchmark of 15, as well as the broader market’s current 24 or so. The peers mentioned above have PEs lower than that at Cintas.

And finally, the number of shares outstanding is worth a look. When companies buy back their shares, that number shrinks. But secondary offerings of stock and stock compensation increase that total. Investors tend to prefer a declining total, as that increases their stake over time. Cintas shares outstanding have decreased every year since 2010, when the total was about 153 million, to about 103 million last year. Note though that the company’s guidance at the end of last year indicated no future share buybacks.

Summary

Is the dividend safe?

Cintas’s status as a Dividend Aristocrat is encouraging, and most of the other metrics look good as well.

The free cash flow issue seems to be minor, so long as it does not deteriorate. The bigger issue is the high PE ratio, which suggests that the stock is expensive. However, despite a couple of metrics that bear watching, it appears that the Cintas dividend is safe for now.