Watsco Inc. (WSO”>WSO) has maintained its streak of dividend increases for eleven consecutive years with a 9% hike to 62 cents. The new dividend will be paid on January 31, 2012 to shareholders of record on January 13, 2012.
The dividend hike comes almost after a year. In February 2011, Watsco had hiked its dividend to the current level of 57 cents by 10% from the prior dividend of 52 cents.
The recent increase has been made possible by Watsco’s sound balance sheet and cash position. As of September 30, 2011, cash and cash equivalents increased to $21.0 million from $18.6 million on June 30, 2011. The company’s debt-to-total-capitalization remained conservative at 10%
Furthermore, throughout the 2000-2010 timeframe, Watsco’s operating cash flow was approximately $850 million and net income was approximately $600 million, in line with the company’s stated goal of generating cash flows greater than net income.
Watsco reported fiscal 2011 third quarter record EPS of $1.02, a 5% increase over 97 cents reported in the year-earlier quarter. Total revenue increased 12% year over year to $914 million in the reported quarter, inclusive of $6 million from new locations.
Our Take
Watsco continues to increase its market share through strategic acquisitions and new product offerings. The company’s joint venture with Carrier not only added new products to its sales mix, but also marked its entry into international markets with the addition of the Latin American and Caribbean sales operations. Moreover, the company continues to benefit from the transition to higher-efficiency air-conditioning equipment.
United States currently has 89 million central air conditioning and heating systems installed, which are older than 10 years. These systems are generally below the government mandated energy efficiency and environmental standards. Thus, Watsco has a great opportunity to replace these older systems with its lower energy consumption and environment-friendly solutions.
However, a decline in housing starts, reduction of the tax credit for homeowners for purchasing a high efficiency HVAC unit and higher costs of replacing with the R410A refrigerant, remain concerns. The shares of Watsco currently retain a Zacks #5 Rank (short-term Strong Sell recommendation).
Watsco is the largest distributor of air conditioning, heating and refrigeration equipment as well as related parts and supplies in the United States. The company operates 508 locations serving over 50,000 customers in 36 states, Puerto Rico, Latin America and the Caribbean. Watsco competes with the likes of Johnson Controls Inc. (JCI”>JCI), Gensco Inc and Gustave A. Larson Company.
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