Dividend Champions come in all sizes, though most investors are probably familiar with the larger names that have been raising dividends for decades.
One smaller company that has nearly three decades of dividend growth and appears poised for future increases due to its sound business model is Badger Meter Inc. (NYSE:BMI).
Company background and results history
Badger Meter manufactures the meters and valves that are used to measure and control the flow of air, gases and liquids. The company receives the bulk of its revenue from municipal water utilities, but Badger Meters products are used in end markets such as chemicals, HVAC and oil and gas. The $2.4 billion company generates annual revenue of $505 million.
With high marks almost across the board, Badger Meter receives a GF Score of 94 out of 100. Based on the fundamentals, the companys business looks to be in good shape, which should help support the dividend.
Dividend safety analysis
Badger Meters dividend yield is on the low side at 1%. The stock has rarely offered much in the way of income, averaging a yield of just 1.3% since 2012. However, this is more of a product of an increase in share price than a question of commitment to growing the dividend.
The companys dividend has a CAGR of 9.7% over the last decade, but this growth rate accelerates to almost 12% when looking at the last five years. This includes an 11.1% increase for the Sept. 10, 2021 payment date, which extended the companys dividend growth streak to 29 years. Shareholders can expect the next dividend raise to be announced near the end of August if Badger Meter sticks to its usual schedule.
Badger Meter has managed aggressive dividend raises for the last decade because the companys business continues to expand. Despite double-digit average increases for the last 10 years, the payout ratios have been in a tight range.
The company distributed 76 cents of dividends per share in 2021 while earning $2.08 for a payout ratio of 37%. Shareholders should see dividends of at least 80 cents per share this year. Based on analysts estimates, the projected payout ratio is also 37%. Both figures are very close to the 10-year average payout ratio of 39% for the company.
Using free cash flow as a lens into dividend safety shows that distributions are well covered. Over the last year, Badger Meter has distributed of $23 million of dividends while generating free cash flow of $60 million for a payout ratio of 38%. This is above the average free cash flow ratio of 27% since 2018, but still in a very safe range.
Because the company currently has zero long-term debt, all available capital can be used to cover dividend payments. This should provide an extra layer of security to Badger Meters dividend.
Badger Meter has faced a difficult year along with much of the market.
The stock is down more than 23% year to date, though this has led to an improvement in Badger Meters valuation.
The GF Value chart, which uses a variety of metrics to determine fair value, shows the stock is undervalued.
Badger Meter closed on Friday at $81.76. The stock has a GF Value of $92.35, resulting in a price-to-GF Value of 0.89. Reaching the GF Value would mean a 13% gain in the share price.
Badger Meter is a small company, but is very much a leader in its industry. The company has a portfolio of advanced products that are in demand from customers. This technical advantage has enabled Badger Meter to grow its dividend for a long period of time. And with reasonable payout ratios and no long-term debt, the companys dividend is poised to continue to grow at a fast pace.
At the same time, Badger Meters stock is trading at a discount to its intrinsic value not seen since late 2020. For investors looking for an entry point into the name, now could prove to be an opportunity to purchase shares of the company at a more reasonable valuation.
This article first appeared on GuruFocus.