Investing has become incredibly democratized over the last decade or so.

It’s easy, fast, and (almost always) free to buy stocks these days, compared to it being difficult, slow, and excruciatingly expensive back when I was young.

The sheer number of products available to investors boggles the mind.

But some things are timeless.

Some things don’t change.

One such unchanged truth is that great businesses can make for some of the very best long-term investments.

This truth shines through when employing the dividend growth investing strategy.

That’s a long-term investment strategy which encourages buying and holding shares in high-quality businesses paying out reliable, rising cash dividends to shareholders.

You can find hundreds of examples over at the Dividend Champions, Contenders, and Challengers list, which has pulled together data on US-listed stocks that have raised dividends each year for at least the last five consecutive years.

You’ll find one great business after another on that list, and you’ll also find that many have been phenomenal long-term investments.

It’s pretty intuitive, since it’s hard to make money over time when investing in a bunch of crummy businesses.

I’ve been using the dividend growth investing strategy for more than 15 years now, allowing it to guide me as I’ve gone about building the FIRE Fund.

That’s my real-money portfolio, and it generates enough five-figure passive dividend income for me to comfortably live off of.

This created a situation whereby I was able to quit my job and retire in my early 30s, as my Early Retirement Blueprint describes.

Now, while great businesses can (and often do) make for excellent long-term investments, paying way too much can throw that idea right out the window.

Having discipline around valuation is another timeless principle.

Whereas price is simply what you pay, value is what you ultimately 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.

The global investing ecosystem has changed a lot (and gotten much larger) over the last 10 or 20 years, but it’s as true as ever that undervalued high-quality dividend growth stocks can lead to incredible long-term investment results and even unlock financial freedom.

Of course, being able to tell whether or not something is undervalued first requires some basic knowledge about the process of valuing a business.

That’s where Lesson 11: Valuation comes in.

Written by fellow contributor Dave Van Knapp, it’s a concise masterclass in all things valuation and can quickly get almost anyone up to speed on what valuation is and how to go about estimating the fair value of 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…

Cintas Corp. (CTAS)

Cintas Corp. (CTAS) is an American provider of business supplies.

Founded in 1929, Cintas is now a $69 billion (by market cap) supplies leader employing nearly 50,000 people.

The company reports results across three segments: Uniform Rental and Facility Services, 77% of FY 2025 sales; First Aid and Safety Services, 12%; and All Other, 11%.

The company supports more than 1 million businesses, primarily in the US.

While Cintas provides a number of supplies to businesses (such as first aid products and restroom materials), which gives it the ability to be a capable “one-stop shop” outsourcing partner, uniforms is the bread and butter.

Cintas is America’s leading supplier of corporate uniforms (with an estimated 40% market share).

Cintas designs and manufactures uniforms to clients’ specs.

After initial delivery, Cintas collects, cleans, and delivers these uniforms on a repeating schedule.

Cintas takes on the initial upfront capital investment of uniform creation, as well as the ongoing expenses of upkeep/maintenance, in exchange for small recurring fees to businesses.

These uniforms, as well as the related business supplies, are often mission critical and completely necessary to the function/hierarchy of the workplace, and the fees Cintas charges tend to be a minuscule portion of a company’s cost structure.

This dynamic between high value and low cost has made Cintas an essential component of Corporate America.

And it helps to explain why Cintas has been reliably generating revenue, profit, and dividend growth for decades.

Dividend Growth, Growth Rate, Payout Ratio and Yield

Indeed, Cintas has increased its dividend for 43 consecutive years.

That easily qualifies it for its status an esteemed Dividend Aristocrat.

Its 10-year dividend growth rate of 20.4% is extremely, extremely impressive in two ways.

First, in pure absolute terms, a 20%+ 10-year dividend growth rate is rare and high, serving as a data point indicating we’re dealing with a fast-growing, high-quality business.

Second, in more relative terms, Cintas was already a Dividend Aristocrat more than 30 years into growing its dividend at the start of the last decade.

To put out this kind of dividend growth this late in the game is pretty incredible.

Yet, with a payout ratio of 38%, the dividend remains easily covered.

The only way a payout ratio could remain this low in the face of such high dividend growth is if the business itself is growing very quickly, so we’re off to a great start here.

All that said, the stock’s yield of 1.1% is the one big drawback here.

However, it would be almost silly to expect a high yield with this kind of growth.

Moreover, that’s right about what the stock yielded a decade ago, but those who passed it up because of the low yield missed out on a monster decade of returns and plenty of dividend income that incrementally added up via the raises.

I’d also note this yield is 20 basis points higher than its own five-year average, so there’s a bit more income to be had here than usual.

Cintas has been an all-star dividend growth stock for decades.

As long as one isn’t in dire need for income today, this could be a phenomenal long-term investment.

Revenue and Earnings Growth

As much as that may be, though, a lot of this is based on past information.

However, investors must have possible future information in mind, 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 come in handy during the valuation process.

I’ll first show you what the business has done over the last ten years in terms of its top-line and bottom-line growth.

I’ll then reveal a professional prognostication for near-term profit growth.

Lining up the proven past with a future forecast in this manner should allow us to make assumptions regarding where the business could be going from here.

Cintas grew its revenue from $4.8 billion in FY 2016 to $10.3 billion in FY 2025.

That’s a compound annual growth rate of 8.9%.

Strong top-line growth here.

Meanwhile, earnings per share moved up from $1.55 to $4.40 over this period, which is a CAGR of 12.3%.

As great as this is, because FY 2016 was an unusually strong starting year for EPS, it’s hard to say if it fully encapsulates the real EPS growth power of Cintas.

The five-year EPS CAGR is closer to 15%, for example.

Steady buybacks and margin expansion have both helped to drive excess bottom-line growth.

The outstanding share count has been reduced by about 7% over the last 10 years, helping to supercharge strong top-line growth.

Looking forward, CFRA believes that Cintas will compound its EPS at an annual rate of 11% over the next three years.

Again, maybe because Cintas is such an impressive operation, as good as 11% would be, I’m not sure this forecast gives full credit to what Cintas is capable of.

Supporting its stance, CFRA sees balance between strong fundamentals and tough comps.

Regarding the latter, as Cintas grows, I think it does get tougher and tougher to put up jaw-dropping numbers.

Adding to this dynamic is the fact that Cintas recently made a bid to acquire competitor UniFirst Corp. (UNF) for $5.5 billion.

Cintas is already the clear leader, but adding the third-largest company in this space would make it a giant.

While this adds scale and takes out a competitor, giving the combined enterprise that much more pricing power, it introduces even more questions regarding size, comps, and the law of large numbers.

I’d also like to point out that there’s some minor noise around this name regarding fears of AI taking out labor and how that could impact demand for uniforms (i.e., less workers means less uniforms).

In my view, that kind of thinking is misguided, as AI is currently threatening a lot of white-collar work, which is not an issue for Cintas.

Cintas provides uniforms predominantly for blue-collar workers.

If AI-powered robots start to take over blue-collar work, too, we’re then talking about a whole new world in which almost all jobs are automated and the whole global economy is structurally different.

An investment in Cintas would be the least of my concerns in that scenario.

One other thing to like about Cintas is the fact that the founding Farmer family still owns something like 14% of the company, and the founder’s son, Scott Farmer, is Chairman.

I love this “skin in the game”, which aligns common shareholders with management.

Overall, I think CFRA has a fair take on the near-term EPS growth trajectory, which would open up Cintas for like, or even better, dividend growth over the foreseeable future.

Layering that on top of the starting yield sets the name up for a low-teens type of annualized total return.

Considering this stock has delivered a 10-year CAGR of over 20%, including reinvested dividends, a low-teens number isn’t a big ask.

Financial Position

Moving over to the balance sheet, Cintas has a great financial position.

Its long-term debt/equity ratio is 0.5, while the interest coverage ratio is over 20.

The company commands very high credit ratings well into investment-grade territory: A3, Moody’s; A-, S&P.

I’d also note long-term debt has been mostly stable over the last decade, meaning Cintas has avoided gorging on debt (which is something that sadly cannot be said for a lot of other American companies).

Profitability is outstanding.

Return on equity has averaged 36.6% over the last five years, while net margin has averaged 16.1%.

ROIC is typically over 20%.

A hallmark of a great business is high returns on capital, and Cintas is clearly delivering.

There’s almost nothing to dislike about this business; it’s a high-quality enterprise in pretty much every way.

And with economies of scale, entrenched relationships with contracts, route density, and switching costs, the company does benefit from durable competitive advantages.

Of course, there are risks to consider.

Competition, regulation, and litigation are omnipresent risks in every industry.

I view all three of these risks as somewhat subdued for Cintas relative to a lot of other business models, especially regarding competition since it already handily leads its market and is positioning to acquire one of its chief competitors.

Input costs can be volatile.

The company is exposed to macroeconomic conditions, as a weak economy would bleed through into reduced employment and less demand for uniforms and other services.

Although the company does most of its business in the US, it does have some modest exposure to foreign markets and the geopolitics and exchange rates therein.

My view is that Cintas is a relatively low-risk business model, which probably helps to explain why its business and stock have both been almost straight up and to the right for decades.

Valuation

However, the stock is in the midst of a rare 20% drawdown, which may have created an entry point on a stock that is usually quite expensive…

The P/E ratio is now at 36.7.

Yeah, that’s still quite high, isn’t it?

To be honest, this is at the outer edge of what I’m even willing to look at.

But this is noticeably lower than its own five-year average of 41.

The P/CF ratio of 27.2, which isn’t totally unreasonable, is also below its own five-year average of 29.6.

And the yield, as noted earlier, is 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 15%, and a long-term dividend growth rate of 8%.

I’m basically splitting the difference between the 10-year proven dividend growth rate and the more near-term, go-forward expectation for EPS growth.

That latter is what will largely support dividend growth from here, although some modest payout ratio expansion could occur.

I don’t see Cintas capable of delivering another decade of 20%+ dividend growth, but a slowdown into a mid-teens area is not an unrealistic scenario at all.

I’d then assume a high-single-digit type of growth rate over the long run, befitting of a high-quality business that is already large and mature.

The DDM analysis gives me a fair value of $174.78.

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 appears to have dropped right into a fair value zone after it’s rare drawdown.

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 CTAS as a 3-star stock, with a fair value estimate of $186.00.

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 CTAS as a 3-star “HOLD”, with a 12-month target price of $195.00.

I came out on the low end, but we’re all in the same neighborhood. Averaging the three numbers out gives us a final valuation of $185.26, which would indicate the stock is possibly 6% undervalued.

Bottom line: Cintas Corp. (CTAS) is a wonderful business with fantastic fundamentals. It’s been an incredible performer for decades, and nothing indicates it’s stopping. With a market-like yield, double-digit dividend growth, a low payout ratio, more than 40 consecutive years of dividend increases, and the potential that shares are 6% undervalued, this looks like a rare buy-the-dip opportunity in one of the highest-quality Dividend Aristocrats in existence.

-Jason Fieber

Note from D&I: How safe is CTAS‘s dividend? We ran the stock through Simply Safe Dividends, and as we go to press, its Dividend Safety Score is 97. 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, CTAS’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 CTAS.