There are many parts of the world where upward mobility is nearly impossible.
I’d actually say most of the world is like this.
But the US is a bit of an anomaly, which helps to explain why Warren Buffett has called being born in the US as winning the “genetic lottery”.
This upward mobility potential is, perhaps, most explicitly visible in the US stock market – the largest and most robust stock market in the world.
Anyone in the US can access this market and take advantage of the incredible power of US capitalism.
Capitalism allows regular individuals to invest in wonderful businesses that are compounding money at high rates and rewarding shareholders.
Rewards can come in the form of steadily growing cash dividend payments – my favorite form of reward.
This is why I’m such a fan of dividend growth investing.
This long-term investment strategy, which entails buying and holding shares in high-quality businesses that pay safe and growing dividends to shareholders, is all about regular cash rewards that get bigger over time.
To see what I mean, take a look at the Dividend Champions, Contenders, and Challengers list.
This list has put together indispensable information on hundreds of US-listed stocks that have raised dividends each year for at least the last five consecutive years.
These are some of the best businesses in the world.
They’re generating gobs of profits, and they’re returning chunks of those profits back to shareholders through those rising cash dividends.
And any of us can participate in this incredible game.
Like Buffett said, it’s akin to winning the lottery.
I’ve been participating for nearly 15 years now, and it’s changed my life.
I was able to go from below broke in my late 20s to financially free and retired in my early 30s.
My Early Retirement Blueprint recounts how that happened (and how you can do it, too).
Suffice it to say, the dividend growth investing strategy had a lot to do with my success, as it’s helped me to build the FIRE Fund.
That’s my real-money portfolio, and it produces enough five-figure passive dividend income for me to live off of.
Now, this strategy involves more than just investing in the right businesses.
There’s also the matter of investing at the right valuations.
Price is only what you pay, but value is what you actually get.
An undervalued dividend growth stock should provide a higher yield, greater long-term total return potential, and reduced risk.
This is relative to what the same stock might otherwise provide if it were fairly valued or overvalued.
Price and yield are inversely correlated. All else equal, a lower price will result in a higher yield.
That higher yield correlates to greater long-term total return potential.
This is because total return is simply the total income earned from an investment – capital gain plus investment income – over a period of time.
Prospective investment income is boosted by the higher yield.
But capital gain is also given a possible boost via the “upside” between a lower price paid and higher estimated intrinsic value.
And that’s on top of whatever capital gain would ordinarily come about as a quality company naturally becomes worth more over time.
These dynamics should reduce risk.
Undervaluation introduces a margin of safety.
This is a “buffer” that protects the investor against unforeseen issues that could detrimentally lessen a company’s fair value.
It’s protection against the possible downside.
Not letting the “genetic lottery” win go to waste by buying high-quality dividend growth stocks at attractive valuations and taking advantage of US capitalism is one of the smartest things an American can do.
As easy as it is to talk about all of this, the whole concept of valuation may seem intimidating to the uninitiated.
Fear not.
This is where Lesson 11: Valuation comes in.
Written by fellow contributor Dave Van Knapp, it lays out valuation in simple-to-understand terminology and even provides a valuation template that can be used on almost any dividend growth stock you’ll run across.
With all of this in mind, let’s take a look at a high-quality dividend growth stock that appears to be undervalued right now…
Nordson Corp. (NDSN)
Nordson Corp. (NDSN) is an American multinational corporation that manufactures equipment used for the precise dispensing of adhesives, coatings, sealants, and other materials.
Founded in 1909, Nordson is now a $12 billion (by market cap) manufacturing might that employs about 8,000 people.
Approximately 66% of sales are international.
The company reports results across three segments: Industrial Precision Solutions, 56% of FY 2024 sales; Medical and Fluid Solutions, 26%; and Advanced Technology Solutions, 19%.
All three segments involve the manufacture of precision dispensing equipment which is customized for customers and purposes across a variety of industries and applications.
Niche manufacturers like Nordson fly under the radar, despite the fact that many of them (including, obviously, Nordson itself) consistently put up solid results, year and in year out, for decades on end.
The fact that these companies operate in a niche is exactly what makes them so great.
Because niches can be small and limiting, there’s this natural, built-in resistance to attracting competition.
A lot of would-be competitors out there can’t be bothered with a small niche, and so they look for something else with a massive TAM.
This leaves the likes of Nordson free and clear to quietly operate and compound capital.
One interesting and appealing aspect of Nordson’s business model is that it utilizes the razor-and-blade model, with sales nearly evenly split between systems and parts/consumables.
This creates recurring revenue with a high degree of visibility into future sales, where established systems designed to work with consumables creates switching costs and a “sticky” customer base.
Furthermore, Nordson has taken all of this simple and practical wonderfulness and combined it with a programmatic acquisition strategy that scales the business beyond organic growth potential through tuck-in acquisitions designed to open up new opportunities and markets.
All of this helps to explain why Nordson has created an amazing track record for revenue, profit, and dividend growth.
Dividend Growth, Growth Rate, Payout Ratio and Yield
To this point, Nordson has increased its dividend for an incredible 61 consecutive years.
As a Dividend King, it’s earned its status as a vaunted Dividend Aristocrat two times over.
This is one of the longest track records for consistent dividend growth in the world.
The 10-year dividend growth rate is 15.4%, which is strong and just goes to show that a very long track record of dividend growth does not somehow preclude also having fast dividend growth.
To grow the dividend at a double-digit rate more than 50 years into things is mightily impressive.
No signs of any slowdown, either, as even the most recent dividend raise came in at over 14%.
That said, Nordson has had trouble putting together much EPS growth over the last couple of years, so the dividend growth right now is temporarily floating on an expanding payout ratio.
That’ll have to reconcile at some point in the near future, preferably through the business getting back to normalized growth.
Despite some modest expansion of late, the payout ratio is still only 38.5%.
This leaves Nordson with plenty of flexibility around future dividend growth, although much of it will have to be powered by business growth.
The stock’s 1.5% yield is, perhaps, the one major drawback regarding the dividend profile, but high-quality compounders like this do not tend to have high yields.
I’d also note that this yield is 60 basis points higher than its own five-year average, which is a nice spread.
Nordson is not a household name.
Like I mentioned earlier, this kind of business flies under the radar.
However, there’s no doubt that it has shown spectacular commitment to the dividend and the growth of it.
Revenue and Earnings Growth
As spectacular as it has been, though, many of the dividend metrics I just revealed are based on the past.
However, must always be looking toward the future, as today’s capital gets risked for tomorrow’s rewards.
Thus, I’ll now build out a forward-looking growth trajectory for the business, which will be of aid when the time comes later to estimate fair value.
I’ll first show you what the business has done over the last decade in terms of its top-line and bottom-line growth.
I’ll then reveal a professional prognostication for near-term profit growth.
Amalgamating the proven past with a future forecast in this way should give us an ability to evaluate where the business could be going from here.
Nordson increased its revenue from $1.7 billion in FY 2015 to $2.7 billion in FY 2024.
That’s a compound annual growth rate of 5.3%.
Good stuff.
I like to see a mid-single-digit (or better) top-line growth rate from a mature business like this.
Nordson is right on the mark.
Meanwhile, earnings per share grew from $3.45 to $8.11 over this period, which is a CAGR of 10%.
Great.
Love to see double-digit bottom-line growth, and this includes flattish EPS over the last three years.
The excess EPS growth was mostly driven by steady margin expansion over the last decade, but this does appear to have stalled/topped out.
Looking forward, CFRA believes that Nordson will compound its EPS at an annual rate of 6% over the next three years.
This is a relatively somber outlook on Nordson.
Based on what I see, Nordson caught up to an unusual spike in demand and is working through a bit of a lull while new sales are digested before it goes on another run.
The pandemic caused a ripple in regular supply and demand; otherwise, seeing some bounce in the business isn’t strange.
In my view, CFRA’s conservative forecast would have been more appropriate a couple of years ago when demand was being caught up to.
In my view, if anything, Nordson could be positioned nicely to reaccelerate bottom-line growth after FY 2025.
Now, the company is only guiding for mid-single-digit adjusted EPS growth for FY 2025.
Not great.
However, Nordson’s “Ascend” strategy calls for 6% to 8% average annual revenue growth and 10% to 12% average annual adjusted EPS growth between 2025 and 2029.
That’s more like it.
This would be roughly in line with what Nordson has done over longer periods of time.
Supporting this view are two big improvements in the business over the last decade, which should lead to that acceleration I just mentioned.
First, parts/service have gone from less than 40% of revenue to more than 50%.
Revenue is now more recurring and predictable.
It’s a subtle change, but I think it greatly helps Nordson over time.
Second, through the programmatic acquisition strategy, the business has greatly expanded its footprint in growth end markets (including electronics, which can require very precise dispensing solutions).
Growth end markets have moved from 29% to 49% over the last decade, which is a vast improvement.
Speaking on this M&A activity, CFRA notes (emphasis added by me): “We anticipate an improving long-term growth trajectory as [Nordson] executes on its “NBS Next” strategy – a data-driven growth framework that identifies profitable growth opportunities that warrant outsized capital investment – first launched in 2021. M&A is a key priority within this capital deployment strategy, with several criteria for acquisition targets, including a differentiated precision technology-based product portfolio, exposure to attractive high-growth end-market applications, “Nordson-like” gross margins (50%+), and a customer-centric business model.”
I mean, you have got to love the sound of that.
By the way, that emphasized portion corroborates what I just stated about an acceleration in Nordson’s growth trajectory, so I think CFRA is simply cautious around the next year or two but optimistic over the long run.
Fair enough, although my reports always try to view things through an extremely long-term lens.
Putting it all together, I don’t see anything to indicate that Nordson will not continue to grow the business and dividend at proven rates, respectively, over the coming years (albeit with some probable slowness over FY 2025 and FY 2026).
This implies low-double-digit EPS growth and mid-teens dividend growth over the long run, although near-term expectations around dividend growth should be tempered (Nordson’s acquisitive nature, stalled organic growth, and balance sheet needs will likely limit the size of dividend raises over the next year or two).
For dividend growth investors who like high-quality compounders (this stock’s CAGR is ~11.5% over the last 10 years), this is music to the ears.
Financial Position
Moving over to the balance sheet, Nordson has a solid financial position.
The long-term debt/equity ratio is 0.4, while the interest coverage ratio is approximately 8.
These are fine numbers, but Nordson’s balance sheet was markedly healthier only a few years ago.
The company’s programmatic acquisition strategy does result in the balance sheet carrying debt, but I don’t see a problematic situation here.
Notably, Nordson completed its acquisition of ARAG Group, a leader in precision control systems and smart fluid components for agricultural spraying, in 2023.
This was Nordson’s largest acquisition ever, which helps to explain why the balance sheet is currently more indebted than usual.
Circling back around to a point I just made a few paragraphs ago, I don’t believe Nordson will want to push the balance sheet much more than it already has, so dividend raises over the next few years will likely be somewhat limited by the company’s acquisitions and balance sheet management.
Profitability for the firm is excellent.
Return on equity has averaged 19.6% over the last five years, while net margin has averaged 17.4%.
ROIC is commonly in the mid-teens area.
Nordson frequently produces high returns on capital, which is a hallmark of a high-quality compounder (via the ability to reinvest capital at high rates of return).
Nordson’s hold over its niche, further strengthened by tuck-in acquisitions, should continue to serve it and its shareholders well for many years to come.
It’s a terrific business.
And with economies of scale, a large installed base of equipment, switching costs, R&D, IP (over 2,000 patents and counting), the company does benefit from durable competitive advantages.
Of course, there are risks to consider.
Litigation, regulation, and competition are omnipresent risks in every industry.
Many of the company’s end markets are cyclical, exposing Nordson to a lot of cyclicality (although 50%+ of sales being recurring does mitigate this risk).
The programmatic acquisition strategy introduces execution and integration risks, and there’s always the risk that Nordson’s management could overpay for acquisitions (although there is no clear sign of this being a pattern thus far).
The heavy international footprint exposes Nordson to geopolitical risks and currency exchange rates.
The balance sheet is currently more stressed than usual, which will likely weigh on acquisition deal flow and dividend growth over the next several years.
Input costs are variable and largely outside of the company’s control.
While these risks are certainly worth considering, the quality of this business must be kept in mind.
Also, with the stock down nearly 20% in a year in which the broader market is up more than 20%, this severe underperformance, which is rare, has created a valuation that is worth considering…
Valuation
This stock’s P/E ratio is now sitting at 25.8.
That’s not low on its own, but it does compare quite favorably to its own five-year average of of 32.8.
This stock’s earnings multiple is regularly over 30, as the market is usually willing to place a strong premium on the name, but a lot of that premium has disappeared in 2024.
The P/CF ratio, at 19.8, is also far lower than ordinary (it’s typically well over 25).
And the yield, as noted earlier, is significantly higher than its own recent historical average.
So the stock looks cheap when looking at basic valuation metrics. But how cheap might it be? What would a rational estimate of intrinsic value look like?
I valued shares using a two-stage dividend discount model analysis.
I factored in a 10% discount rate, a 10-year dividend growth rate of 13%, and a long-term dividend growth rate of 8% thereafter.
I’m basically extrapolating out the proven 10-year dividend growth rate out into the next decade, albeit at a slightly slower pace.
There are offsetting factors at play.
On one hand, there’s the acceleration in the company’s longer-term growth profile, which I highlighted earlier.
On the other hand, there’s the balance sheet management and acquisitive nature of the firm.
Overall, I think it’s fair to assume the next decade won’t be quite as good as the last one in terms of dividend growth, but a radical departure from the norm seems extremely unlikely.
From there, a high-single-digit longer-term growth trajectory is not a very high hurdle to clear for the likes of Nordson.
The DDM analysis gives me a fair value of $256.78.
The reason I use a dividend discount model analysis is because a business is ultimately equal to the sum of all the future cash flow it can provide.
The DDM analysis is a tailored version of the discounted cash flow model analysis, as it simply substitutes dividends and dividend growth for cash flow and growth.
It then discounts those future dividends back to the present day, to account for the time value of money since a dollar tomorrow is not worth the same amount as a dollar today.
I find it to be a fairly accurate way to value dividend growth stocks.
This stock’s ~20% slide during December 2024 created a nice buy-the-dip opportunity, in my view, as I now see a margin of safety (which was previously lacking).
But we’ll now compare that valuation with where two professional stock analysis firms have come out at.
This adds balance, depth, and perspective to our conclusion.
Morningstar, a leading and well-respected stock analysis firm, rates stocks on a 5-star system.
1 star would mean a stock is substantially overvalued; 5 stars would mean a stock is substantially undervalued. 3 stars would indicate roughly fair value.
Morningstar rates NDSN as a 4-star stock, with a fair value estimate of $246.00.
CFRA is another professional analysis firm, and I like to compare my valuation opinion to theirs to see if I’m out of line.
They similarly rate stocks on a 1-5 star scale, with 1 star meaning a stock is a strong sell and 5 stars meaning a stock is a strong buy. 3 stars is a hold.
CFRA rates NDSN as a 3-star “HOLD”, with a 12-month target price of $245.00.
I came out slightly high, although we’re in a decently tight range here. Averaging the three numbers out gives us a final valuation of $249.26, which would indicate the stock is possibly 16% undervalued.
Bottom line: Nordson Corp. (NDSN) is a high-quality business operating in a lucrative niche, fending off competition. Moreover, it’s reinforcing its position through tuck-in acquisitions. It’s not a household name, but it’s been a high-quality compounder for decades. With a market-beating yield, a low payout ratio, a double-digit dividend growth rate, more than 60 consecutive years of dividend increases, and the potential that shares are 16% undervalued, this Dividend Aristocrat and Dividend King looks to be buyable after its recent correction.
-Jason Fieber
Note from D&I: How safe is NDSN’s dividend? We ran the stock through Simply Safe Dividends, and as we go to press, its Dividend Safety Score is 94. Dividend Safety Scores range from 0 to 100. A score of 50 is average, 75 or higher is excellent, and 25 or lower is weak. With this in mind, NDSN’s dividend appears Very Safe with a very unlikely risk of being cut. Learn more about Dividend Safety Scores here.
P.S. If you’d like access to my entire six-figure dividend growth stock portfolio, as well as stock trades I make with my own money, I’ve made all of that available exclusively through Patreon.
Disclosure: I have no position in NDSN.
