By: Dividend Sensei
World Class Management Has Cracked The Code For Minting Money In China
Investors have to trust that a company’s management team knows how to allocate their capital well, as well as navigate the various complexities of adapting and growing in a fast changing world. A.O Smith is led by Ajita Rajendra, who has been with the company for 13 years, and is just the 9th CEO of this 144 year old company (average tenure 16 years). In other words, this company has a very deep and rich management culture of disciplined, but aggressive growth.
A.O Smith broke into the Chinese market over 20 years ago and now sells its water heaters, and water and air purification systems in over 20,000 retail locations nationwide. In China A.O Smith has also managed to build a fast growing e-commerce business which by itself accounted for 8.3% of the entire company’s sale in 2017.
- U.S.: 43%
- Canada: 20%
- China: 34%
- Europe/Middle East: 5%
- India: less than 1%
When it comes to China exposure no dividend aristocrat has more, thanks to its ability to adapt to local consumer tastes and preferences.
That ability is why A.O Smith’s Chinese sales have grown 21% annually for the last decade, and now account for 34% of total revenues. And with China’s middle class set to grow to 600 million by 2022 (about double the entire US population), demand for its products is likely to keep booming. That’s especially true for its water and air purifiers in one of the most polluted nations on earth. But just as A.O Smith managed to become a dominant force in China, management has now set its eyes to an even larger potential market, India.
And Is Now Pushing Big Into India
A.O Smith entered the Indian market in 2008, and began manufacturing water heaters, and water purifiers in the country in 2010, and 2015, respectively. In 2017 its Indian sales grew 44%, though off a small base. Today India represents just 1% of company sales.
Management is investing aggressively to build that momentum because economists estimate that by 2030 there will be 53 million urban middle class or affluent households in India (representing a population equal to nearly the entire US today). A.O Smith is building out a vast distribution network in India’s largest 25 cities and already established strong relationships with the top retailers in India (the country’s equivalent to Lowe’s and Home Depot).
All told management thinks that with China and India leading the charge, it should be able to generate long-term 8% sales growth. Ongoing cost cutting (improving economies of scale), and share buybacks are expected to boost that to about 11% to 12% long-term growth in EPS and free cash flow per share. Which bodes very well indeed for the company’s overall dividend growth and total return potential.