In my Dividend Aristocrats series, I have analyzed many corporations that have been increasing their dividend payments every single year for more than six decades. In this discussion, I will feature another dividend aristocrat, Nordson Corp. (NDSN, Financial), an industrial conglomerate that has 60 years of uninterrupted annual dividend increases.
As a result, its share price has also been rising. In the past decade, Nordson's stock has climbed 266%, delivering shareholders a decent compounded annual return of 14%. Let's take a closer look to determine whether the stock could fit into the portfolios of long-term investors at the current price.
Business overview
Nordson is an innovative precision technology company that operates through three main segments: Industrial Precision Solutions, Medical and Fluid Solutions and Advanced Technology Solutions.
Industrial Precision Solutions is the largest revenue contributor, generating more than $1.39 billion and accounting for 53% of the total in 2023. Medical and Fluid Solutions ranked second, with $660.32 million in revenue and representing 25% of total sales. Advanced Technology Solutions generated $577.3 million in revenue, or 22% of the total for the year.
All three business segments also enjoy double-digit operating margins. The Industrial Precision Solutions segment is the most profitable with a 33% operating margin. The Medical and Fluid Solutions division followed closely behind with 28.70% operating margin. The Advanced Technology Solutions unit has the lowest operating margin of 17.60%.
Source: Nordson's presentation
Growing revenue and profitability with a high return on invested capital
Some of Nordson's products, which service the electronics, metal finishing and polymer processing industries, are cyclical and sensitive to general economic conditions. Thus, whenever there is an economic downturn, Nordson's business is affected.
The company has proven to be quite resilient, however, with revenue on a rising trend. Its revenue has increased from $667.40 million in 2003 to nearly $2.63 billion in 2023, delivering a compounded annual growth rate of 7%. In the past two decades, Nordson experienced declining sales in only four years, including the global depression in 2008 and the Covid-19 pandemic period. Its operating income followed a similar pattern, growing from $68.22 million to $672.76 million.
Nordson has also consistently delivered sustainably decent double-digit returns on invested capital. In the past decade, the company's ROIC has fluctuated in the range of 11.29% to 17%. Its 10-year average ROIC is 13.42%. In 2023, the ROIC settled at 13.09%. The consistently solid ROIC demonstrates the company's ability to efficiently allocate capital to generate good returns in varying market conditions.
Strong cash flow generation
Along with increasing revenue and operating income, Nordson is also a cash cow, with growing operating cash flow and free cash flow. The operating cash flow surged from $87.60 million in 2003 to $641.30 million in 2023, while free cash flow rose from $80 million to $606.70 million over the same period.
The growing free cash flow provides the company with a lot of flexibility to make strategic decisions, such as new market entry, new project investments and acquisitions, without the need to rely on external financing. Furthermore, the company can use those cash flows to reduce debt and return cash to shareholders via dividend payments and share repurchases.
Strong balance sheet with high goodwill and intangibles
Nordson also has decent balance sheet strength. As of January, it recorded $2.72 billion in shareholders' equity. The cash and cash equivalents came in at $136.20 million. The goodwill and intangible assets were more than $3.47 billion.
The high amount of goodwill and intangible assets tells us that Nordson has been expanding its business via a series of acquisitions. In the past 20 years, the company has acquired 23 companies in various fields, including precision technology solutions, manufacturing of medical devices and inspection solutions. Many investors might worry about the potential write-down of its goodwill and intangibles as that could be a potential risk, but Nordson has a good history of successful acquisitions, so I think it is not a concern for the company and its shareholders.
Its total interest-bearing debt and lease obligations were recorded at nearly $1.66 billion. Thus, the debt-to-equity ratio was quite reasonable at 0.61. Moreover, the debt maturities have spread out until 2033, with varying principal payment from $32 million to $500 million. With an operating cash flow of $641 million, I think Nordson could settle interest and debt principal obligations easily.
Source: Nordson's 10-Q filing
Returning cash to shareholders
Nordson has a history of returning cash to shareholders via dividends and share repurchases. The company has spent more than $1.88 billion to buy back shares, reducing the total share count from 73 million in 2004 to 57.63 million in 2023. Further, Nordson has been growing its dividend per share year over year for the past 60 years. Its dividend per share has increased from 30 cents to $2.63 over the course of two decades, delivering a compounded annual growth rate of nearly 11.50%.
Fairly valued
To value the stock, let's use the Gordon Growth Model, which is suitable for evaluating companies with a consistent dividend growth history. Let's assume the company will continue to grow its dividend by 11%. By applying a discount rate of 12%, we can estimate the stock's intrinsic value as follows:
P = Expected Dividend for 2024 / (Required Rate of Return - Dividend Growth Rate)
= $2.63 *(1+11%) / (12%-11%)
= $291.93
Applying the Gordon Growth Model, Nordson's intrinsic value is estimated at around $291.93 per share, only 6% higher than the current trading price. Thus, Nordson is currently fairly valued.
Key Takeaway
Nordson has delivered increasing revenue and operating income, generating consistently high ROIC and growing cash flow while maintaining a healthy balance sheet. Although the analysis suggests the stock is currently fairly valued, its legacy of uninterrupted annual dividend increases over six decades and its operating performance efficiencies has made it an attractive option for investors seeking reliable dividend growth in the industrial sector.
