Pentair, A Cheap Aristocrat With 40 Straight Years Of Dividend Growth

Pentair (PNR) is a lesser known dividend aristocrat that most recently boosted its dividend by 5%, representing its 40th consecutive year of dividend increases.

Weak energy markets, slumping commodity prices, and unfavorable foreign currency exchange rates are wreaking havoc on the company, which has seen its stock price plummet by more than 30% over the last year.

However, two of the company’s four segments delivered organic growth last year, and a third is poised to return to growth in 2016. Three of its businesses have also delivered healthy margin expansion, and a well-known activist investor took a 7% stake in the company in mid-2015 (the stock has since sold off by nearly 40%).

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Business Overview

PNR was formed in 1966 and is a diversified industrial manufacturing company that sells a wide range of products including valves, water system products, actuators, switches, pumps, filters, enclosures, heat management systems, and more.

By end market, PNR generated 33% of its 2015 sales in the residential and commercial construction, 25% in industrial, 23% in energy, 10% in food & beverage, and 9% in infrastructure markets.

By geography, PNR generated 49% of its 2015 sales in the U.S., 18% in Western Europe, 14% in China / SE Asia / India / Middle East, 13% in the Rest of the World, and 6% in Canada.

Segments

Technical Solutions (33% of sales, 22% segment margin): sells products that guard and protects some of the world’s most sensitive electronics and electronic equipment, as well as heat management solutions designed to provide thermal protection to temperature sensitive fluid applications.

Valves & Controls (27% of sales, 13% segment margin): sells valves, fittings, automation and controls, and actuators. PNR acquired most of this segment from Tyco International’s spinoff of its flow control business in 2012. Nearly 60% of this segment is exposed to energy markets, with the remaining 40% selling into industrial markets. Half of the business is aftermarket products and services.

Flow & Filtration Solutions (20% of sales, 13% segment margin): sells solutions for filtration, separation, flow and fluid management challenges in agriculture, food & beverage processing, water supply, and a variety of industrial applications.

Water Quality Systems (20% of sales, 20% segment margin): sells water system products and solutions to meet filtration and fluid management challenges in food & beverage, water, swimming pools, and aquaculture applications.

Business Analysis

While PNR has a number of technologically-advanced products, R&D is not a major competitive advantage (the company spends 1.5-2.0% of its sales on R&D, which amounted to $117 million in 2014).