Cintas' Divestitures and Buybacks Reward Patient Shareholders
NEW YORK (TheStreet) -- "Price is what you pay, value is what you get," said Warren Buffett, a quote that serves as a reminder to investors to focus less on where a stock is today and more on the future returns it can provide. In that vein, despite valuation concerns about industrial company Cintas (CTAS) - Get Report, shares of which are trading around their all-time high, it's more important to focus on how and why the stock has outperformed -- and whether it can continue.
Despite recent spikes in materials costs that have pressured margins at Cintas, management keeps the company profitable, buoyed by its divestment strategies, which have helped Cintas focus more on its bottom line. And as the bottom line has grown, the company has rewarded shareholders with buybacks. Ahead of the company's fiscal third-quarter earnings results Wednesday, Cintas looks poised to extend its streak of profitable quarters to 10.
Cintas was trading higher early Monday, hitting an all-time high of $85.22. The shares have gained more than 8% so far in 2015, besting both the Dow Jones Industrial Average (DJI) and the S&P 500 (SPX) , which have traded flat. And over the past year, investors have seen their holdings appreciate by more than 40%.
The reason for these gains? Cintas, headquartered in Cincinnati, has posted nine consecutive quarters of profits. For the last five quarters, profit has climbed by an average of more than 20% above the quarter in the prior year, including an almost 50% jump in the fourth quarter.
Cintas' largest business segment is its uniform rentals unit, which is benefiting from the improving economy and a labor market that is adding jobs. It's a simple equation: As more people get hired, businesses need more uniforms for them, and that has been the trend over the past five years, during which time Cintas shares have more than tripled.
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The company also provide services such as restroom supplies, tile and carpet cleaning, first aid/safety products and fire protection. Until recently, Cintas also provided document management services.
In an effort to rid itself of non-core operations, Cintas in November sold off its document storage and imaging business. The company instead formed a new partnership with privately held document management firm Shred-it International, in which Cintas took a 42% stake. Since that announcement, Cintas shares have soared as much as 45%.
The company has also rewarded shareholders via its share repurchasing program. Over the past 10 years, Cintas has bought roughly 30% of its outstanding shares, resulting in strong earnings-per-share growth. And the company is not done. In January, Cintas announced that its board had authorized a new round of buybacks worth $500 million, over and above its current buyback program, which still has roughly $240 million remaining.
All told, since the company originally announced its buyback in July 2013, Cintas has taken more than 4 million shares off the market at an average price of around $60. Compared to Monday morning's trading prices in the neighborhood of $85, the company has gained an average of more than 41% on those buybacks.
Investors contemplating those strong gains should be aware, however, that Cintas shares -- at a P/E of 23 -- are still trading on par with the market's average P/E of 21, and pay a quarterly dividend of 21.25 cents. And with earnings projected to grow at an annual rate of 12% over the next five years, according toCNN Money, Cintas shares still present excellent value.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.
