Cintas (CTAS) is one of the highest scoring dividend stocks in our database for Dividend Safety (98) and Dividend Growth (99). The company has proven to be an extremely durable business with roots dating back nearly 90 years, and it has rewarded its shareholders with higher dividend payments for 32 consecutive years.
This is really one of the most consistent sales and earnings growers around, and it operates in a very slow-changing industry where it maintains leading market share. At the right price, we would certainly considering owning CTAS in our Top 20 Dividend Stocks portfolio.
Business Overview
CTAS started out as a laundry service for businesses during the Great Depression and has grown to become the largest provider of uniform programs in North America. As the company has grown, it has added facility services, first aid and safety services, entrance mats, restroom supplies, document management, fire protection, and more to its offerings.
Today, CTAS serves over one million business customers and clothes more than five million workers every day in North America. Approximately 70% of its customers are in the service-providing sector of the economy, and the remaining 30% are in goods-producing industries such as oil, gas, coal, construction, and manufacturing.
Business Analysis
In some ways, CTAS’s business is comparable to a garbage collection company. The business provides each worker with enough uniforms for two weeks. One clean set is for his current workweek, while the other is being laundered and repaired by CTAS.
CTAS will send a rep to the customer’s facility to pick up worn garments and drop off each worker’s clean uniforms for the next week.
It doesn’t take a genius to do laundry, so this commodity business is all about efficiency and being the low cost provider in a particular area (friendly service reps help, too).
With weekly stops made at every customer, route density is the best way to achieve lower costs than competitors because the cost of transportation (i.e. truck trips) can be spread across numerous customers. To accomplish this, CTAS has over 350 distribution facilities and more than 8,000 local delivery routes. Some customers prefer or need to do business with larger players that have more of a nationwide reach, and being closer to customers also results in better service because delivery times are shorter.
Smaller competitors will have miniscule margins if they try to compete in one of CTAS’s established areas because their transportation and operating costs are higher. They would also have to disrupt long-standing relationships that CTAS’s reps have with each customer, although we view that as a smaller competitive advantage. On the other hand, CTAS has the luxury of acquiring these companies to gain new geographies and increase its network density in existing regions, realizing meaningful cost synergies for the acquired businesses.
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