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Roper Technologies: Premier Dividend Growth Stock

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By Wednesday, 13 January 2021 08:49 PM Current | Bio | Archive

Industrial stocks were punished in 2020 as COVID-19 caused widespread shutdowns and declines in consumer spending around the world. However, that proved to be extraordinary buying opportunities for the best industrial stocks, many of which have since soared to new highs.

One such stock is Roper Technologies (ROP), a company that has a very long history of producing strong growth, and has a nearly three-decade streak of raising its dividend. This longevity and reliable growth in both earnings and the dividend means institutions like Akre Capital Management own the stock in large quantities. In this article, we’ll take a look at Roper’s business, its growth prospects, and the company’s very reliable dividend.

Business Overview

Roper is an industrial conglomerate that develops a mix of software and engineered products for customers worldwide. Among its offerings is a variety of cloud-based analytics and management platforms for laboratories, schools, food service, health care and more. The company also offers specialized imaging software for health care customers, as well as supply chain software, RFID card readers and pharmacy software, among others.

Roper’s industrial product portfolio also includes ultrasound accessories, testing instruments, dispensers and metering pumps, control valves, leak detection equipment, consumables and a wide variety of other categories. Roper’s catalog of products and services is very wide and deep and appeals to a huge list of customers worldwide.

The company was founded in 1981, and in the years since its founding, has grown to $5.6 billion in annual revenue and a $46 billion market capitalization.

Growth Prospects

We see Roper’s growth prospects as being quite strong, both because it has generated strong, reliable growth over long periods, but also because it is well-positioned to continue to do so. The company’s earnings-per-share has grown by nearly 19% annually in the past decade, although we expect a modest earnings decline for 2020 given unprecedented pandemic conditions. We fully expect a rebound in earnings starting in 2021.

We see average annual growth of 8.5% from today’s level of earnings in the next five years, driven by a variety of factors. Roper continues to produce organic revenue and earnings growth over time, which should help toward producing growth. In addition, Roper has proved willing and able to acquire attractive targets, and management has recently made bullish comments about the opportunities they have in the marketplace for further acquisitions.

Roper’s Q3 earnings results showed mixed results, but investors would do well to keep in mind the Q3 period included pandemic conditions across much of the world, and that we expect fourth quarter results – due out at the end of January – to show strong sequential improvement.

Revenue was up 1% in Q3 to $1.35 billion, but earnings-per-share declined 4% to $2.64. Strong results were seen in software solutions, which helped offset the declines in certain industrial segments. With software performing nicely during the pandemic, we expect the rebound in 2021 to come primarily from improving industrial product sales.

Roper also made a significant purchase with its acquisition of Vertafore, a provider of software-as-a-solution to the property and casualty insurance industry. The acquisition is sizable as Vertafore has nearly $600 million in annual revenue and was acquired for $5.35 billion.

The company updated its guidance range for 2020 to a new range of $12.55 to $12.65, and our current estimate is the midpoint of $12.60.

Dividend Analysis

Roper’s dividend was recently increased for the 28th consecutive year, meaning it is part of the exclusive Dividend Aristocrats. Roper’s payout is ultra-safe as its payout ratio is just 16% on 2020 earnings, and has spent most of the last decade under 15%.

This gives Roper significant flexibility to continue to raise the payout for many years to come, and in large quantities. Given the company’s history of large dividend increases, as well as strong projected earnings growth rates, we see Roper producing 9% annual dividend increases in the years to come.

Combined with the company’s strong history of growth, as well as its robust projected growth rate looking forward, we see Roper as a high-quality dividend growth stock, and believe the company likely has decades of dividend increases in front of it.

Final Thoughts

Roper Technologies is a high-quality business with a long history of strong growth. The valuation is elevated today at nearly 35 times 2020 earnings, which compares unfavorably to our fair value estimate of 26 times earnings. The current dividend yield is low, at 0.5%, the company more than makes up for it with a high rate of dividend growth, including a recent 10% increase in November.

For investors wanting very strong dividend growth, an ultra-safe payout, and a business that produces reliable earnings growth, Roper checks all the boxes.

Bob Ciura has worked at Sure Dividend since October 2016. He oversees all content for Sure Dividend and its partner sites. Bob received a Bachelor’s degree in Finance from DePaul University, and an MBA with a concentration in Investments from the University of Notre Dame.

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Industrial stocks were punished in 2020 as COVID-19 caused widespread shutdowns and declines in consumer spending around the world.
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Wednesday, 13 January 2021 08:49 PM
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