Watsco Declares Special Dividend (JCI) (WSO)

The board of directors of Watsco Inc. (WSO) recently announced a special cash dividend of $5.00 per share and a quarterly cash dividend of 62 cents per share. Both the dividends will be paid on October 31, 2012 to shareholders of record at the close of business on October 15, 2012.

The special dividend is based on the current annual dividend rate of $2.48 and amounts to approximately two years of dividends. The special dividend will amount to a total payout of around $172 million.

Watsco has consistently paid dividends for over 35 years and has increased its dividend over the last 11 consecutive years. Even though the company intends to continue paying quarterly cash dividends, but hinted the dividend rate might moderate in 2013, giving due consideration to its financial position, government tax policy and general economic conditions.

Watsco delivered a record second quarter both in terms of revenue and profits. Adjusted EPS in the quarter was $1.15, a 6% increase the year-ago quarter earnings of $1.09, but missing the Zacks Consensus Estimate of $1.30.

Total revenue increased 15% to $1.01 billion, missing the Zacks Consensus Estimate of $1.04 billion. Same-store sales increased 2%, including a hike of 5% in air conditioning and heating (HVAC) equipment and a 16% rise in commercial refrigeration products, while sales of other HVAC products dropped 4%.

Watsco paid $41 million in dividends in the first half of 2012. Earlier in January, Watsco’s board of directors approved a 9% increase in its quarterly dividend to 62 cents per share. It marked the 11th consecutive year of steady dividend increase.

The company expects earnings in the band of $3.15 to $3.25 per share, down from the previous expectation of $3.25-$3.40 per share. This represents a growth rate between 15% and 19% over 2011. The Zacks Consensus Estimate for the year currently stands at $3.19.

Cash and cash equivalents were $35.2 million as of June 30, 2012, compared with $18.1 million as of March 31, 2012. For the first half of fiscal 2012, operating cash flow was $60 million compared with $42 million in the comparable period of 2011. With debt-to-total-capitalization ratio at 16%, the company has substantial flexibility to make additional investments and pay dividends going forward.

The company continues to increase its market share through strategic acquisitions and expansion of its product offering. The company's earlier joint ventures with Carrier not only added new products to its sales mix, but also marked Watsco's entry into the international markets with the addition of Latin American and Caribbean sales operations. In addition, Watsco has acquired about 60% shares of Carrier’s HVAC network in Canada to form a joint venture. The company expects the acquisition to be accretive in 2012. With the deal closure, the company’s sales run-rate is roughly $3.4 billion.

Furthermore, the company sees huge potential in the replacement market as old units get replaced by more energy-efficient units in the coming years. There are approximately 89 million central air conditioning and heating systems installed in the United States that have been in service for more than 10 years, with the older systems operating below government mandated energy efficiency and environmental standards. Moreover, higher efficiency units drive higher pricing and higher margins for the company.

Currently, we have a long-term Neutral recommendation on Watsco. The company, which competes with Johnson Controls Inc. (JCI) and privately held Gensco Inc., retains a short-term Zacks #3 Rank (Hold).