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As the dividend goes, so goes the share price.
If I’ve proved the axiom once, I’ve proved it a dozen times. I offer proof once again.
Expeditors International of Washington (NASDAQ: EXPD) isn’t a high-yield dividend grower, but it is a persistent dividend grower. Expeditors has continually increased its dividend for the past 23 years.
A $0.0625 per-share annual dividend in 1994 has grown to a $0.84 per-share annual dividend today. Expeditors’ dividend growth has averaged 12% over the time frame.
As for the share price, it sits above $58 (split adjusted) as I write. In 1994, it sat at $1.30. Expeditors shares have appreciated at an 18% average annual rate over the past 23 years.
More growth — dividends and share price — are on offer.
Expeditors is a consolidator. Its business is to buy space in volume from carriers — airlines and ocean shipping lines — and resell the space to shipping customers. It then up-sells this primary business with ancillary services.
The largest segment, air freight services, generates 40% of annual revenue. The segment purchases cargo space on airlines and resells it to customers. Lower prices is the advantage. Expeditors, by buying and shipping in bulk, receives a lower price relative to cargo weight from the airline.
The ocean freight segment, 32% of annual revenue, offers a similar consolidating service. Expeditors buys space in bulk and then consolidates and sells the space at a discount.
The third and smallest segment, customs brokerage and import services, generates 28% of annual revenue. Customers pay Expeditors to clear shipments through customs. Getting the freight to the destination port is meaningless if you can’t get it home.
A Great Business Model
All segments are profitable; all produce industry-enviable returns on invested capital. It’s a tidy, efficient business model.
It’s tidy and efficient because Expeditors owns no aircraft or ships. By eschewing aircraft and ship ownership, Expeditors eschews the operating risk associated with large capital expenditures, higher operating costs, and asset utilization.
Eschewing operating risk engenders a strong, liquid balance sheet. Expeditors carries no long-term debt. Financial risk is minimal. Revenue is continuously converted to cash. The cash balance stands at $1.2 billion. Existing liabilities could be extinguished and Expeditors would be left with $200 million in the till.
Everything in the rearview mirror looks fine. What about the view out the windshield?
World trade grew at a shrug-inducing 1.3% rate last year, which is low by historical standards. The world should be at least marginally more frenetic in the immediate future. The World Trade Organization (WTO) expects world trade to grow between 1.8% to 3.6% in 2017, with the range stepping up to 2.1% to 4% in 2018.
Expeditors’ fortunes ebb and flow with trade volume. The company reported first-quarter revenue of $1.5 billion, which beat the consensus estimate (albeit a downgraded estimate) by 2%. EPS, at $0.51, didn’t. EPS posted $0.05 short of what most analysts expected.
But the future is our concern. After a 7.8% decline in 2016, Expeditors revenue should rise 8% in 2017, and then 4.5% in 2018. As global trade growth ramps up, I look for a ramp-up in air and ocean shipping volumes.
As we wait for earnings growth to resume, management nudges value creation along its merry path.
Expeditors Dividend Swells Every Year
The dividend is one nudge. The dividend grows annually. Share buybacks are another. The share count shrinks annually. Both nudges — rising dividends and falling share count — will extend through 2017 and beyond.
Expeditors shares trade at 23 times forward EPS estimates. This seems high in isolation, but it’s low from a historical perspective. The multiple has averaged closer to 27 than 22 over the past 10 years.
Expeditors offers a reasonable entry price. Better yet, it offers a reasonable entry price on a persistent and proven dividend grower — and that’s what matters.
Dividend growers can be amazing investments. Even better are these huge one-day dividend payouts.
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