Dividend Aristocrats In Focus: A.O. Smith Company

 Up to date on February 18th, 2025 by Felix Martinez

Yearly, we individually evaluation 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 possibly can see a full downloadable spreadsheet of all 69 Dividend Aristocrats, together with a number of vital monetary metrics reminiscent of price-to-earnings ratios, by clicking on the hyperlink under:

Disclaimer: Positive Dividend shouldn’t be affiliated with S&P International in any manner. S&P International owns and maintains The Dividend Aristocrats Index. The knowledge on this article and downloadable spreadsheet relies on Positive Dividend’s personal evaluation, 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 info on this article or spreadsheet is official knowledge from S&P International. Seek the advice of S&P International for official info.

The following Dividend Aristocrat in our 2025 collection 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 business water heaters, boilers, and water therapy merchandise. Two-thirds of its gross sales are in North America, and a lot of the stability 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 because of 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 means 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 worth will increase and better boiler and water therapy 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 because of weaker demand in China, regardless of a 13% native foreign money gross sales improve in India. Fourth-quarter gross sales on this section dropped 9%, with adjusted earnings declining because of decrease gross sales volumes in China.

For 2025, A. O. Smith expects gross sales progress to be between flat and a couple 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 anticipated 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

Development 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 therapy, and air purification merchandise, the corporate is reliant on a financially wholesome shopper and housing market.

When dwelling costs are rising, and unemployment is low, customers with disposable earnings are rather more keen to spend money on 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 reminiscent of China are set to drive A.O. Smith’s progress.

Supply: Investor Presentation

China’s large inhabitants, strong GDP progress, and booming center class are main tailwinds on this vital market. As well as, due to the nation’s extreme air pollution, the demand for air purifiers ought to stay sturdy.

We anticipate A.O. Smith to develop earnings-per-share at a price of 6% per yr by means of 2030. The corporate ought to be capable to obtain not less than this degree of progress because of 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 business market share.

Possessing the highest {industry} place offers A.O. Smith pricing energy and excessive margins. In flip, this enables the corporate to generate a number of money movement, which permits it to spend money on new product innovation.

One potential threat 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 through 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’ll be able to see, the corporate carried out very nicely throughout 2008 and 2009, the worst years of the recession. Earnings took a big 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

Primarily based on the present share worth of ~$65 and the midpoint of 2025 EPS steerage 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 acceptable truthful 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 truthful worth estimate of 19, it could improve annual returns by 2.3% over the following 5 years.

Earnings progress and dividends can even 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 following 5 years since valuation a number of growth is anticipated to assist the anticipated earnings-per-share progress and the dividend barely.

Last 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 engaging.

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

Thus, the inventory valuation stays truthful. In consequence, we view the inventory as comparatively engaging to buy. However, we price AOS inventory a maintain for now.

Moreover, the next Positive Dividend databases comprise probably the most dependable dividend growers in our funding universe:

When you’re on the lookout for shares with distinctive dividend traits, take into account the next Positive Dividend databases:

The most important 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: