Recent Buy: July 2014

ao-smith-water-heaters bulkToday we saw a plethora of great companies offer up discounted share prices as the S&P500 had its lowest single day drop since April of this year.  With the Russia-Ukraine conflict, a mixed earnings season, and global economic growth concerns, we’ve seen jittery market noise in July; however, today’s news about Argentina’s second debt default in 12 years was the icing on the cake that provided us DGIer’s some very nice long-term investment opportunities.   While some investors worry about where the market will go from here, I’m only focused on how my individual companies will grow from here.  Even though my portfolio is new, I’m confident in the long term income my holdings will provide despite short term prices.   I’m buying into companies that pay annual growing dividends that will one day pay all of my expenses.

Today, I initiated a small position in a great mid-cap company.  It’s been around for over a century and raising annual dividends for over 21 years.  It has a 10 year dividend growth rate of 9.1% and a 3 year DGR of 25.40% including a 25% raise this year.  There have been consistent share repurchases and growth has been exploding in recent years as it is transforming into a global leader in a field that uses our planet’s most common resource: water.   Everyone loves Coca-Cola and Pepsi because they make big profits with water, but there are other ways to make money with good ole’ H2O. I purchased 30 shares of A. O. Smith Corporation (AOS) for $46.55 each with a $6.95 commision for a total cost of $1,403.45.  I paid less than the 200-Day moving average price of $49.57, but I still paid a pretty big premium on the one year trailing p/e of 22.17.  However, the 2015 forward p/e is a reasonable 17.90.  While the growth potential of this investment is very high, it comes with a very low dividend yield of only 1.29% which adds $18.00 to my forward annual income for a new total of $882.80.  This is a new investment for me and my portfolio now holds 15 positions.

Everybody loves a hot shower.  We all appreciate the convenience of clean clothes and dishes.  And what can be more enjoyable than a relaxing dip in a hot tub or whirlpool?  There’s nothing like hot water, and one company has been delivering the world’s hot water for more than 70 years . . . A. O. Smith.  But today’s A. O. Smith is about more than hot water.  We recently entered the water purification industry to deliver clean water to consumers in China and other fast-growing parts of the world.  It’s all about water, and A. O. Smith has a singular focus on becoming a global leader in water technology.”  ~http://www.aosmith.com/

AOS has long been a leader in water heaters, purification systems, and other cutting edge water related products as it continues to thrive in the United States.  Expansion into China has only started in the past decade and growth has been spectacular.  Chinese consumers are moving away from poor water quality and toward trusted water treatment brands such as A. O. Smith.  The company has already captured a 20% market share in China with a 10 year CAGR of 28% there .   China has a goal for its citizens to be 60% urban by 2020 and they’ll be needing clean and hot water for all the new houses, apartments, and businesses.   AOS has also seen strong recent growth in India and Turkey.  I believe AOS has a tremendously positive outlook for major future growth. Here are more reasons I like AOS:

  •  Strong growing balance sheet for future acquisitions, share repurchases, and dividend increases
  •  Stable/Growing  and impressive product line and replacement market (Yes!  Replacement parts and products revenues are growing steadily!)
  •  3-Year Average Revenue Growth of 13.1%
  •  3-Year Average Income Growth of 15%
  •  Debt / Equity: 0.2
  •  Broad current distribution channel with a proven expansion strategy for future worldwide population growth

Check out the AOS website and the Summer Investor Presentation for a more in depth and easy to follow look at the company.  Here are a few highlights:

AOS_adjustedeps

AOS_marketsharetrend

AOS_retailwholesale

What do you think of AOS?  Did you make any purchases during today’s drop?  How much further do you think the market will fall?  

My Dividend Growth

http://www.mydividendgrowth.com

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8 thoughts on “Recent Buy: July 2014
  1. JC @ Passive-Income-Pursuit.com

    I’ve been trying to find a play on the water market because that’s going to be even more important than oil. Especially as the global population continues to grow. I’ll have to look into AOS a bit more to get to know the company a bit better but it looks pretty good. Except for that low starting yield but the payout ratio is pretty small. Definitely something to check out.

     
    Reply
    1. My Dividend Growth

      JC,

      Glad to hear from you, thanks for checking in. You’re so right, water is a great future investment and AOS not only makes money from water purification in developing countries, but also from water heaters once the country is urbanized. It is a very competitive industry though, and it’ll be interesting to see how fast this company grows with their recent successful venture into water treatment. Despite the small yield, I’m hopeful for large dividend increases in the coming years. If you research it more, let me know what you think.

      Have a great weekend!
      Ryan

       
      Reply
    1. My Dividend Growth

      Henry,

      Thank you very much for stopping by and for the support. This is definitely a different pick than usual. I first saw it on the CCC list early in the year and have been reading and watching closely. Regarding the flat revenue, AOS is a very different company after 2009 when it first entered the water purification industry. This has turned out to be a huge growth vehicle for the company especially in faster developing countries like China and India. Also, recently in 2011 is when AOS first declared their strategy to become a leading global water technology company. Before this it was mainly about the U.S. and water heaters. I recommend checking out the companies ‘Historical Milestones’ on their website, lot’s of positive new growth developments for this very old company.

      Take care this weekend!
      Ryan

       
      Reply
  2. Dividend Gremlin

    Ryan,

    Good long term buy. If they ever cracked the desalinization market in Southern Cali you’d be sitting on the proverbial gold mine. Either way, I agree with JC above it is going to be as big as oil some day.

    Buys where you get future income, growth, and a financial buffer is a good buy. I do think the market will shed some more points. Most investors are just too antsy when they see conflicts or potential bumps in the road – like the messes in the Ukraine/Russia, Israel, Iraq, etc.

    Let’s keep rooting for the little guys, cause well that is us.

    – Gremlin

     
    Reply
    1. My Dividend Growth

      Dividend Gremlin,

      Great to hear from you again, glad to have you sign off on this purchase. The proverbial gold mine will be mine! Hehe, you bring up a good point that water technology and innovation has a lot of potential, even in the U.S. Looks like you’re right on the market pulling back a little more, I’ll be making a purchase again here soon. Have a fun weekend 🙂

      All my best,
      Ryan

       
      Reply
    1. My Dividend Growth

      R2R,

      Glad to help provide a research candidate for you, let me know what you think after you’ve read up. I had never heard of AGU before your recent buy, it also looks very promising! You’ve got an exciting watchlist for August and I’ll be looking forward to seeing where you end up. Have a wonderful weekend!

      Take care,
      Ryan

       
      Reply

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