Sunday, November 9, 2014

Is Pentair a Dividend Stock to Buy?


Pentair PLC (NYSE: PNR  ) is one of the lesser known Dividend Aristocrats -- stocks that have raised their dividend for 25 consecutive years or more -- but that doesn't mean it lacks attention from certain quarters. The company specializes in water flow technology (valves, controls, and process technologies) and often gets attention from investors looking for a thematic way to play the increasing need for the management of water resources. Are these two factors -- water and a dividend -- enough to make the stock a long-term buy for income seekers?

More cyclical than you might think

The theory is as simple as it is attractive. Long-term population growth, particularly in emerging markets, will lead to a 25% increase in freshwater demand by 2030. Moreover, we live in a world where, according to the UN CEO Water Mandate, one-third of the population already lives in "water-stressed countries." Given the strains that an increasing population will put on water infrastructure, for agriculture and industry as well as human consumption, the need for investment is substantial.
So is Pentair's long-term demand assured, and should you go ahead and buy this Dividend Aristocrat?
Investing is rarely that simple, of course, and the reality is that Pentair's prospects turn out to be quite cyclical in nature. The following chart demonstrates the significant declines in its revenue and operating income in the last recession. Don't be fooled by the dramatic increases from 2012 onward; that's due to a $5 billion acquisition of the valve and flow control operations of Tyco. (More on that later.)


Source: Morningstar.

Guidance cut

Moreover, earlier this year, Pentair was forced to reduce its earnings estimates for 2014 and 2015 for a couple of cyclically related reasons. The range of its 2014 EPS guidance was reduced from $3.85-$4 to $3.65-$3.70 -- a $0.25 reduction at the midpoint. Its 2015 EPS guidance was likewise reduced from $5 to $4.50. There were two main reasons for the decline, and both are cyclically related.


READ THE FULL EQUITY RESEARCH ARTICLE HERE