Dividend Aristocrats In Focus: A.O. Smith Corporation

 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 progress 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 akin to price-to-earnings ratios, by clicking on the hyperlink under:

Disclaimer: Positive Dividend is just not affiliated with S&P International in any method. S&P International owns and maintains The Dividend Aristocrats Index. The data on this article and downloadable spreadsheet is predicated 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 primarily based. Not one of the data on this article or spreadsheet is official information from S&P International. Seek the advice of S&P International for official data.

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

This text will talk about A.O. Smith’s enterprise mannequin, progress prospects, and valuation.

Enterprise Overview

A.O. Smith is a number one producer of residential and industrial water heaters, boilers, and water remedy merchandise. Two-thirds of its gross sales are in North America, and a lot 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 value will increase and better boiler and water remedy gross sales, although decrease water heater volumes offset these beneficial properties. 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 forex 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 progress 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 might proceed declining. India is predicted to see continued double-digit progress. 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 progress.

Supply: Investor Presentation

Progress Prospects

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

When house costs are rising, and unemployment is low, customers with disposable revenue are far more keen to put money into upgrades like new water heaters.

The corporate has loved constant progress within the home market all through a lot of the final decade.

Rising markets akin to China are set to drive A.O. Smith’s progress.

Supply: Investor Presentation

China’s enormous inhabitants, sturdy GDP progress, 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 count on A.O. Smith to develop earnings-per-share at a price of 6% per yr by way of 2030. The corporate ought to be capable of obtain no less than this stage of progress resulting from natural income progress and share repurchases, with potential further acquisitions including additional progress.

Aggressive Benefits & Recession Efficiency

A.O. Smith’s sturdy progress is because of its aggressive benefits, primarily its high 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 industrial market share.

Possessing the highest {industry} place offers A.O. Smith pricing energy and excessive margins. In flip, this enables the corporate to generate lots of money stream, 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 intently tied to the general economic system’s well being. It’s not a extremely recession-resistant enterprise mannequin.

Earnings-per-share throughout the Nice Recession are under:

• 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 major hit in 2010 however rapidly recovered in 2011.

Total, the corporate carried out exceptionally nicely, because it was nonetheless capable of develop earnings over the course of the recession.

Valuation & Anticipated Returns

Based mostly on the present share value of ~$65 and the midpoint of 2025 EPS steering of $3.75, A.O. Smith shares presently 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.

In consequence, 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 will improve annual returns by 2.3% over the subsequent 5 years.

Earnings progress and dividends may also increase shareholder returns, which collectively add as much as 7.5% annualized returns. In abstract, complete returns are anticipated to be 1.6% per yr over the subsequent 5 years since valuation a number of growth is predicted to assist the anticipated earnings-per-share progress and the dividend barely.

Remaining Ideas

A.O. Smith is an industry-leading firm. It has the highest model in its class, with compelling future progress 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 progress alternatives in rising markets are extremely enticing.

Whereas the dividend yield is low, the corporate’s dividend progress tempo and monitor report are spectacular.

Thus, the inventory valuation stays honest. In consequence, 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 essentially the most dependable dividend growers in our funding universe:

In the event you’re in search of shares with distinctive dividend traits, contemplate 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: