As put forward during its fiscal 2010 earnings call, Watsco Inc. (WSO) has declared to pay its hiked dividend of 57 cents on April 29, 2011, to stockholders of record as on April 15, 2011. Watsco has upped its quarterly dividend by 5 cents, which translates into a 10% increase from the prior dividend of 52 cents.
Dividends to shareholders in 2010 increased 16% to $66 million during the year. Fiscal 2010 marked Watsco’s ninth consecutive year of dividend increase. In February 2011, Watsco’s Board of Directors approved a 10% increase in the quarterly dividend rate to the current 57 cents per share. The last dividend hike of 8% to 52 cents was announced on February 17, 2010.
The dividend increase has been possible given Watsco’s sound balance sheet and cash position. As of December 31, 2010, Watsco had cash and cash equivalents of $126.5 million, up from $99.9 million as of September 30, 2009 and $58 million as of December 31, 2009.
During the year, operating cash flow increased 73% to a record $153 million driven by a reduction of $47 million in operating assets and liabilities. Debt-to-capitalization ratio improved further to 1% as of December 31, 2010 from 2% as of September 30, 2010 and 2% as of December 30, 2010.
Furthermore, throughout the 2000-2010 timeframe, Watsco’s operating cash flow was approximately $850 million compared with net income of approximately $600 million, in line with the company’s stated goal of generating cash flows greater than net income.
The company’s performance in fiscal 2010 was impressive. Watsco’s fiscal 2010 EPS was $2.49, a 78% climb over $1.40 in fiscal 2009 and above the Zacks Consensus Estimate of $2.45. Watsco’s revenues grew 42% to a record $2.8 billion beating the Zacks Consensus Estimate of $2.79 billion. Operating income more than doubled to a record $166 million and operating margin expanded by 180 basis-points to 5.8%.
The company expects a shift toward higher-efficiency and environmentally sensitive HVAC systems to continue as conservation efforts, consumer awareness and regulatory norms intensify.
The residential installed base of HVAC systems is outdated and will necessitate replacement as older units become more expensive to repair. Furthermore, sales of commercial products have been promising lately and are expected to recover further as capital spending continues to increase.
Our Take
Watsco continues to increase its market share through strategic acquisitions and through expansion of its product offering. The company’s joint-venture with Carrier not only added new products to its sales mix, but also marked Watsco’s 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.
However, the decline in housing starts, reduction of the tax credit for homeowners for purchasing a high efficiency HVAC unit and higher costs of replacing with R410A refrigerant, remain concerns. We currently have a Zacks #3 Rank (short-term Hold recommendation) on the stock.
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), Gensco Inc and Gustave A. Larson Company.
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