Dividend Aristocrats In Focus: A.O. Smith Company

 Up to date on February 18th, 2025 by Felix Martinez

Yearly, we individually evaluate all of the Dividend Aristocrats. We view them as significantly interesting shares for long-term dividend development traders.

The Dividend Aristocrats are a choose group of shares within the S&P 500 which have had 25+ years of consecutive dividend will increase.

You may see a full downloadable spreadsheet of all 69 Dividend Aristocrats, together with a number of essential monetary metrics corresponding to price-to-earnings ratios, by clicking on the hyperlink beneath:

Disclaimer: Positive Dividend will not be affiliated with S&P World in any approach. S&P World owns and maintains The Dividend Aristocrats Index. The knowledge on this article and downloadable spreadsheet relies on Positive Dividend’s personal evaluate, abstract, and evaluation of the S&P 500 Dividend Aristocrats ETF (NOBL) and different sources, and is supposed to assist particular person traders higher perceive this ETF and the index upon which it’s based mostly. Not one of the info on this article or spreadsheet is official information from S&P World. Seek the advice of S&P World for official info.

The following Dividend Aristocrat in our 2025 sequence is A.O. Smith (AOS), which has elevated its dividend for 31 consecutive years.

This text will focus on A.O. Smith’s enterprise mannequin, development prospects, and valuation.

Enterprise Overview

A.O. Smith is a number one producer of residential and business water heaters, boilers, and water remedy merchandise. Two-thirds of its gross sales are in North America, and many of the steadiness are in China.

A.O. Smith was based in 1874 and is headquartered in Milwaukee, WI. The corporate generates annual gross sales above $3.8 billion.

A.O. Smith reported a 1% decline in 2024 gross sales to $3.8 billion, primarily resulting from weaker demand in China. Web earnings fell 4% to $533.6 million, with diluted EPS down 2% to $3.63, impacted by restructuring bills. Adjusted earnings dropped 5% to $548 million. The corporate returned $496 million to shareholders by way of dividends and share repurchases and accomplished the Pureit acquisition, although it had minimal impression on 2024 outcomes.

In North America, gross sales remained regular at $3.0 billion, pushed by worth will increase and better boiler and water remedy gross sales, although decrease water heater volumes offset these features. Fourth-quarter gross sales declined 7% to $689.8 million. Remainder of World gross sales fell 4% to $918.6 million, primarily resulting from weaker demand in China, regardless of a 13% native foreign money gross sales improve in India. Fourth-quarter gross sales on this section dropped 9%, with adjusted earnings declining resulting from decrease gross sales volumes in China.

For 2025, A. O. Smith expects gross sales development to be between flat and a pair of%, with EPS projected to be between $3.60 and $3.90. North American water heater volumes are anticipated to stabilize, whereas gross sales in China could proceed declining. India is anticipated to see continued double-digit development. The corporate plans to repurchase $400 million in shares and stays targeted on strategic investments, product innovation, and constant dividend funds to drive long-term development.

Supply: Investor Presentation

Progress Prospects

A.O. Smith’s development catalysts within the U.S. embrace continued financial development and rising housing costs. As a producer of water heating, water remedy, and air purification merchandise, the corporate is reliant on a financially wholesome shopper and housing market.

When residence costs are rising, and unemployment is low, shoppers with disposable earnings are way more keen to put money into upgrades like new water heaters.

The corporate has loved constant development within the home market all through many of the final decade.

Rising markets corresponding to China are set to drive A.O. Smith’s development.

Supply: Investor Presentation

China’s large inhabitants, strong GDP development, and booming center class are main tailwinds on this essential market. As well as, due to the nation’s extreme air pollution, the demand for air purifiers ought to stay sturdy.

We anticipate A.O. Smith to develop earnings-per-share at a price of 6% per 12 months by way of 2030. The corporate ought to have the ability to obtain at the least this stage of development resulting from natural income development and share repurchases, with potential further acquisitions including additional development.

Aggressive Benefits & Recession Efficiency

A.O. Smith’s sturdy development is because of its aggressive benefits, primarily its prime market share. A.O. Smith has the #1 market share in U.S. water heaters. It holds over 30% of the home residential market share and over 40% of the business market share.

Possessing the highest {industry} place offers A.O. Smith pricing energy and excessive margins. In flip, this permits the corporate to generate a whole lot of money circulation, which permits it to put money into new product innovation.

One potential danger for A.O. Smith is a recession. As a producer, the corporate is carefully tied to the general financial system’s well being. It’s not a extremely recession-resistant enterprise mannequin.

Earnings-per-share in the course of the Nice Recession are beneath:

• 2007 earnings-per-share of $0.48
• 2008 earnings-per-share of $0.49 (2% improve)
• 2009 earnings-per-share of $0.57 (16% improve)
• 2010 earnings-per-share of $0.43 (25% decline)
• 2011 earnings-per-share of $0.60 (39% improve)

As you may see, the corporate carried out very nicely throughout 2008 and 2009, the worst years of the recession. Earnings took a big hit in 2010 however rapidly recovered in 2011.

Total, the corporate carried out exceptionally nicely, because it was nonetheless in a position to develop earnings over the course of the recession.

Valuation & Anticipated Returns

Primarily based on the present share worth of ~$65 and the midpoint of 2025 EPS steerage of $3.75, A.O. Smith shares at the moment commerce for a price-to-earnings ratio of 17.3. We imagine a price-to-earnings a number of goal of 19 is an applicable honest worth estimate for AOS inventory.

Consequently, A.O. Smith appears undervalued proper now. If the P/E a number of have been to extend to the honest worth estimate of 19, it could improve annual returns by 2.3% over the following 5 years.

Earnings development and dividends can even enhance shareholder returns, which collectively add as much as 7.5% annualized returns. In abstract, whole returns are anticipated to be 1.6% per 12 months over the following 5 years since valuation a number of enlargement is anticipated to assist the anticipated earnings-per-share development and the dividend barely.

Closing Ideas

A.O. Smith is an industry-leading firm. It has the highest model in its class, with compelling future development potential. Its dominant market share of its {industry} permits the corporate to proceed to beat short-term difficulties. Over the long run, we imagine the potential development alternatives in rising markets are extremely enticing.

Whereas the dividend yield is low, the corporate’s dividend development tempo and observe file are spectacular.

Thus, the inventory valuation stays honest. Consequently, we view the inventory as comparatively enticing to buy. However, we price AOS inventory a maintain for now.

Moreover, the next Positive Dividend databases comprise probably the most dependable dividend growers in our funding universe:

For those who’re in search of shares with distinctive dividend traits, think about the next Positive Dividend databases:

The main home inventory market indices are one other strong useful resource for locating funding concepts. Positive Dividend compiles the next inventory market databases and updates them month-to-month: