By: Dividend Sensei
Risks To Keep In Mind
Roper may be a low risk dividend aristocrat but there are still three risks investors need to be aware of.
The first is that, while 80% of its sales are in the US, a fast growing international business still means it faces some currency exposure. For example in a rising dollar environment (like we have today) negative currency translation can hit its top and bottom line by 2% to 3% in any given year. Over time currency risk tends to cancel out but it can create significant short to medium-term growth headwinds.
Another risk to consider is that while 50% of its sales are from recurring sources (among the most of any industrial company’s) the other half is still from cyclical sectors such as industrial firms and oil & gas companies. This means that Roper’s strong long-term growth, including in its dividend, can be lumpy from year to year. Investors owning this stock need to be comfortable with such short to medium-term top and bottom line volatility.
Finally we can’t forget that Roper’s core growth strategy is driven by M&A. While the company’s track record on bolt on acquisitions is stellar, there’s always execution risk with any major purchase. That’s especially true since Roper has begun making larger and more richly priced purchases in recent years. For example in 2016 it made its largest purchase ever, $2.8 billion for software company Deltek. That represented a decent, but still high (by its standards) price to forward sales of 5.2 and 14 times forward cash flow. The recent $1.2 billion acquisition of financial software company PowerPlan was also larger than its usual bolt on acquisitions. For PowerPlan Roper paid 7.3 times forward sales and 18.3 times forward cash flow. Now the PowerPlan premiums don’t yet represent a gross overpayment by any means, not considering the strong growth characteristics of the company it bought.
However, going forward investors will want to watch to see if Roper continues to make larger and more expensive purchases. After all, with the bull market now being in its 10th year, the valuations of technology companies are starting to get to rather frothy levels. If Roper ends up making too large and overpriced a purchase that could end up resulting in a rare management mistake, and a potential write down in the future.
Bottom Line: Roper Technologies Is A Little Known Dividend Aristocrat That You Should Definitely Consider For Your Portfolio
Roper Technologies is one of the best dividend growth stocks that you’ve probably never heard of. While its current yield is nothing to write home about, this fast growing industrial tech company has proven itself to be a master at compounding investor wealth over time. And while it may not be the most undervalued dividend aristocrat you can buy today, for long-term income growth investors I’m highly confident that buying Roper at these prices will leave you far richer in the coming years.