Dividend Growth Stock Overview: A. O. Smith Corporation

About A. O. Smith Corporation

A. O. Smith Corporation is a leading manufacturer of water heaters and boilers for residential and commercial markets. The company is based in Milwaukee, Wisconsin, has 11,400 employees, including 6,000 in China. Products include water heaters ranging from 2.5 – 12,500 gallon capacity, boilers with energy outputs from 40,000 to 2.5 million BTUs, expansion tanks, commercial solar water heating systems, and related products and parts. A. O. Smith is the largest manufacturer of water heaters in North America.

The company has two business segments, divided by geography: North America and Rest of World. The North America segment had sales in 2014 of $1.62 billion and earnings of $238.7 million, up 6.6% and 12.6% from 2013, respectively. This represents 68% of total sales and 69% of total earnings. Of the North American revenues, 63% come from the sales of residential water heaters.

The Rest of World Segment had sales of $768.3 million and earnings of $106.7 million in 2014, an increase of 15.0% and 21.3% from 2013, respectively. The segment has 7 manufacturing plants in 4 countries, including China. In fact, A. O. Smith has operated in China for nearly 2 decades and is experiencing rapid growth there, with sales up 18% from 2013. This growth was offset by lower sales in India dues to a weaker housing market and the loss of a distributor. In addition to its operations in China and India, approximately 8% of the segment’s sales come from markets in Europe, the Middle East and Turkey.

The company has stated that it expects 10% growth in sales in 2015, with earnings per share between $2.60 – $2.85.

A. O. Smith Corporation’s heritage goes back to 1874 when Charles Jeremiah Smith founded a “hardware specialties” company in Milwaukee, Wisconsin. The company made metal parts for baby carriages, expanding in 1889 to making parts for bicycles. By 1895, Charles J. Smith – Machinist, was the largest manufacturer of bicycle frames in the United States. Soon thereafter, C. J. Smith’s three sons joined the business and the name was changed to C. J. Smith and Sons. One of those sons, Arthur Oliver Smith, developed a lightweight steel car frame in 1899 to meet the demand of the new automobile industry. The steel car frame was sold to many of the burgeoning car manufacturers, including Cadillac, Oldsmobile and Ford.

The company continued to advance engineering techniques and, under Arthur O. Smith’s son, Lloyd Raymond Smith, the company developed a technique of fusing glass to steel. This development led to glass-lined beer kegs, large glass-lined brewery tanks and glass lining for a residential water heater tank.

This combination of auto frame manufacturing and the manufacturing of glass and steel fused tanks helped A. O. Smith expand rapidly. By 1910, the company was the largest auto frame manufacturer in North America. Beginning in 1925, the company entered the pressure vessel business and in 1927 entered the line pipe business to support the quickly expanding natural gas and transcontinental oil pipeline industries.

The company continued to innovate through the first half of the 20th century. In the 1930s, the company introduced the first large, single-piece glass-lined brewery tank and began producing glass-lined residential water heaters. In 1940, the company expanded into the manufacturing of electric motors – a business line that it would remain in until 2013 – by acquiring Sawyer Electric of Los Angeles.

Following World War II, the company continued to expand through acquisitions and by building manufacturing plants outside the United States, first to Canada in 1961, to Mexico in 1984 and eventually to China in 1995.

In the late 1990s and early part of the 21st century, A. O. Smith began to focus its business lines to water heaters, water treatment and pressure vessels. It exited the automobile industry in 1997 by selling its business line to Tower Automotive. The acquisition of State Industries, Inc. in 2001 doubled the size of A. O. Smith’s water heater business and in 2009 it entered the water purification business by creating the A. O. Smith (Shanghai) Water Treatment Products Co. Ltd. A. O. Smith expanded manufacturing to India in 2010 to take advantage of a rapidly growing middle class population. In 2013, it sold its electric motor business to Regal Beloit Corporation of Wisconsin.

The company is a member of the S&P Mid Cap 400 index and S&P’s High Yield Dividend Aristocrats index, and trades under the ticker symbol AOS.

A. O. Smith Corporation’s Dividend and Stock Split History

A. O. Smith Dividend Growth

A. O. Smith has nearly tripled its dividend since 2011. (2015 dividend is projected.)

A. O. Smith has paid dividends since at least 1984 and has grown its dividend since 1993. Up until 2013, the company would increase its dividend in third quarter of the year. Since then, however, it has shifted the annual dividend increase to the first quarter, announcing the dividend increase at the end of January and having the stock go ex-dividend the first week of February. This year, A. O. Smith announced a 26.7% increase in its dividend, from 60 cents to 76 cents per share a year. While I expect the next dividend increase in January 2016, the company has aggressively increased its dividend over the last 5 years and it might announce an increase earlier.

For a few years after beginning its record of dividend growth, A. O. Smith grew its dividend by double-digit percentages. However, beginning in 1997 the company slowed its dividend growth to the mid-single digits annually. Most recently, the company has been aggressively increasing the dividend, returning to double-digit percentages beginning in 2011. The dividend growth exceeded 20% from 2012 – 2015.

This strong growth means that A. O. Smith has nearly tripled its dividend over the last 5 years, from a split-adjusted 27 cents in 2010 to a projected 76 cents in 2015. The company has built a 5-year compounded annual dividend growth rate (CADGR) of 23.0%. Longer term, the CADGR is lower, with 10-year and 20-year CADGRs of 13.55% and 9.28%, respectively.

Since beginning its record of dividend growth in 1993, A. O. Smith has split its stock 4 times. The most recent stock split was a 2-for-1 split in April 2013. Prior to that, A. O. Smith split its stock 2-for-1 in June 1993, and 3-for-2 in July 1998 and October 2010. For each share of stock you owned before the stock split in 1993, you would now have 9 shares of A. O. Smith stock.

In addition to the dividends, A. O. Smith has also repurchased 1.78 million shares at a cost of $73.3 million under the current share repurchase program. Authorization to repurchase 2.2 million shares remains under the current program.

Over the 5 years ending on December 31, 2014, A. O. Smith stock appreciated at an annualized rate of 33.11%, from a split-adjusted $13.50 to $56.41. This dramatically outperformed both the 13.0% annualized return of the S&P 500 and the 14.9% annualized return of the S&P Mid Cap 400 index during this time.

A. O. Smith’s Direct Purchase and Dividend Reinvestment Plans

A. O. Smith has direct purchase and dividend reinvestment plans, but you must already be a shareholder to participate. The plans are very favorable to investors, as A. O. Smith covers all the fees when you buy shares, whether through direct purchase or dividend reinvestment. For direct purchases, the minimum is $25 for purchases by check or automatic debit.

When you sell your stock, you’ll pay a sales fee of $10, $25 or $30, depending on the type of sell order you request. You’ll also pay a commission of 10 cents per share. It costs an additional $5 to have the sales proceeds directly deposited to your account.

Helpful Links

A. O. Smith Corporation’s Investor Relations Website

Current quote and financial summary for A. O. Smith Corporation (finviz.com)

Information on the direct purchase and dividend reinvestment plans for AOS

Want to find out about more great dividend growth stocks?

Check out the list of current S&P Dividend Aristocrats.

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