Dividend stocks come in all shapes and sizes, but sometimes it's the boring companies that surprise you. For example, you might expect a technology company like Apple, Inc. to provide a fast growing dividend. But would you believe that a water-heater manufacturer and and air conditioning company are trouncing the iPhone maker when it comes to dividend growth? It's true and a really good reason to get to know A. O. Smith Corporation (AOS -0.67%) and Lenox International Inc. (LII -1.53%).
1. A new market will drive growth
If you live in a developed market then there's nothing exciting about the water heaters that A. O. Smith makes. You are used to getting up and taking a warm shower. However, that's not the case for people living in emerging markets, where hot water is an affordable luxury that people quickly add as they move up the socioeconomic ladder. To put some numbers on that, A. O. Smith is projecting long-term sales growth to be in the low-to-mid single digits in North America, but is looking at mid-teens growth in Asia.
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In emerging markets like China, where sales grew at a 21% annualized pace over the past decade, the business is driven by massive construction programs to support citizens moving from rural to urban areas. That and the shear pleasure of using warm water instead of cold. China makes up around a third of A. O. Smith's revenues and helped drive annualized earnings growth of 26% since 2010. That, in turn, helped the company boost the dividend by 17% a year over the past decade.
The most recent hike at A. O. Smith, meanwhile, was 22%. To put that in perspective, Apple's last hike was roughly roughly 16%. Imagine that... water heaters beating out iPhones. The future at A. O. Smith, meanwhile, is pretty compelling because it is working to exploit a new Asian opportunity -- India. Management believes its addressable market in this giant Asian nation will more than double between 2020 and 2030. And it's still growing in China, including working to expand its reach into the water and air purifying markets.
Water heaters may be boring, but if you are looking for dividend growth, A. O. Smith has proven it knows how to make boring look sexy for dividend investors.
2. Gaining share in the HVAC space
Lennox International makes heating and air conditioning equipment, which you probably take for granted, too. But if you have to suffer without heat on a cold day or without air conditioning on a hot day you suddenly realize just how important these products are to your life. Lennox's primary markets are North America (93% of sales) and Europe, so this isn't an emerging market story.
AOS Dividend Per Share (Quarterly) data by YCharts
The driving force is replacement of old units, which makes up around 75% of the company's business, with a roughly 60/40 split between residential and industrial markets. HVAC units are usually run all of the time, and thus they have limited lifespans. The company's scale and reach is important, as it operates its own store network while competitors generally use outside distributors. That allows Lennox to have more control over the customer relationship, helping ensure product is available and that installers are properly trained and supported. Although simple, these direct customer relationships create a reason for repeat business. In fact, the company believes this distinction has allowed it to gain share in key end markets.
In addition, the company has been working to improve margins via cost cutting efforts. It's been hugely successful on this front, improving its return on sales (the measure the company uses to track performance) from 7.6% in 2012 to 13.4% in 2017. It expects to hit 16.5% by 2020. So cost cutting will support the top and bottom line for at least a few more years, as well. That said, results this year and next are going to face a headwind from a natural disaster that struck one of the company's plants. However, that's unlikely to completely derail its long-term projections.
All in, the company has an incredible dividend record with annualized increase of around 14% over the last 10 years, with roughly 20% increases over the trailing three- and five-year spans. The most recent bump was a whopping 25%! That almost makes Apple's 16% hike look like chump change.
Boring is beautiful
When you are looking for dividend growth stocks it's easy to overlook boring companies with mundane products that you might assume can't compete with exciting names in industries that grab headlines. But when you take a look at the numbers, boring companies like water heater maker A. O. Smith and HVAC specialist Lennox are providing dividend growth that puts some of the best known tech companies to shame. Neither will knock your socks off on the yield front, offering yields in the 1% to 2% range, but if it's dividend growth you are after, it's hard to beat these, perhaps surprising, dividend growers.
