Watsco Inc. (WSO) has announced its decision to hike quarterly dividend by 17% to 70 cents per share from 60 cents. The new dividend will be paid on Jan 30, 2015 to shareholders of record as on Jan 21, 2015.
The increased dividend will take Watsco’s annual dividend yield, which is currently at 2.30%, to 2.70%, outscoring its peers such as AAON Inc. (AAON), Lennox International, Inc. (LII) and Comfort Systems USA Inc. (FIX) with dividend yields of 0.90%, 1.30% and 1.50%, respectively.
Watsco, which has paid quarterly dividends for 40 straight years, had earlier hiked its dividend by 50% to 60 cents in Apr 2014. The recent dividend increase is a result of the company’s sound balance sheet and cash position. As of Sep 30, 2014, Watsco’s cash and cash equivalents amounted to $17 million while its debt-to-total-capitalization remained conservative at 24%.
In the third quarter, Watsco had reported record earnings of $1.56 per share, an 18% increase year over year, led by share gains in the United States and Canada, a stronger sales mix of high-efficiency HVAC (heating, ventilation, and air conditioning), higher gross margins and improved operating efficiencies.
There are approximately 89 million central air conditioning and heating systems installed in the U.S., operating for more than a decade. Watsco will continue to benefit as these old units get replaced by more energy-efficient units in the coming years. Moreover, higher efficiency units mean higher pricing and higher margins for the company.
Watsco’s successful joint venture with Carrier Corporation continues to generate profits. On Jul 1, 2014, Watsco exercised its option to acquire an additional 10% ownership interest in Carrier Enterprise I in the Sun Belt region. In the U.S., the most significant markets for HVAC products lie in the Sun Belt region. Hence, Watsco, which now holds an 80% controlling interest in Carrier Enterprise I, will benefit from its increased stake as it will be accretive to the former’s earnings by 20 cents to 25 cents over the next 12 months.
Watsco has made significant investments over the past year to increase its market share, which includes adding 200 people in sales, marketing, product specialist and store personnel roles; opening eight locations with 20 more expected to come online in the next one year. The branches will improve network density as well as the ability to serve customers locally. Watsco maintains its long-term plans to propel revenues above $10 billion and margins above 10%.
Moreover, Watsco has been historically acquisitive and its growth strategy focuses mainly on geographic expansion through market acquisitions, subsequently increasing revenues and profits from a combination of increased locations, products and services, and improved management practices.
Watsco is the largest distributor of air conditioning, heating and refrigeration equipment as well as related parts and supplies in the United States. The company operates 508 locations serving over 50,000 customers in 36 states, Puerto Rico, Latin America and the Caribbean. Watsco currently holds a Zacks Rank #3 (Hold)
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