Roper Technologies (ROP) is a member of the Dividend Aristocrat Index, counting 29 years of successive annual dividend hikes. Additionally, Roper exhibits a remarkable track record of growth, both organically and through its extensive acquisitions pipeline.
Based on the company’s legendary dividend growth track record, pristine growth pipeline, and a management team that has won the Street’s love over the years, I believe that Roper’s valuation will remain rich moving forward.
That said, due to the ever-present risk that a valuation compression could damage shareholder returns, I am reluctant to allocate capital to the stock. Consequently, I am neutral on the stock.
While most companies that feature such an extended dividend growth track record are usually quite mature, Roper continues to grow at a rather consistent pace. Thus, the stock has attracted an extended shareholder base, comprising both conservative and dividend growth investors.
This is evident by the fact that the stock has consistently retained a steep premium. Any dips, historically, have been rapidly taken advantage of by the market, retaining this trend.
Roper Technologies focuses on manufacturing goods such as medical and scientific imaging equipment, material analysis equipment for a number of industrial applications, and pumps, amongst other products. The company’s Technologies division also develops software solutions for the transportation, food, healthcare, energy, and water industries.
Q1-2022 Results Were Strong; Guidance Increased
In late April, Roper reported its Q1-2022 results, posting another quarter of excellent performance. Quarterly revenues and adjusted EPS came in at $1.53 billion and $3.77, suggesting a year-over-year gain of 11% and 10%, respectively.
The company stepped into Fiscal 2022 on a high note. Specifically, Roper posted 11% organic growth. Growth was driven by all-around strength across its portfolio of niche-leading businesses. Additionally, results were powered by assertive momentum due to double-digit software recurring revenue growth amid vigorous product demand.
Assisted by its EBITDA growth of 8% during Q1 and its net debt decrease of approximately $3.6 billion, Roper reduced its net debt-to-EBITDA ratio to 1.9x from 3.1x at the end of Fiscal 2021.
Roper continues to experience decisive recurring revenue momentum in software, elevated levels of demand, record backlog levels, and advantageous market conditions.
Adding its balance sheet strength and its extensive pipeline of high-quality acquisition prospects, Roper’s management believes the company is well-placed for continuous double-digit cash flow development.
Consequently, management boosted its Fiscal 2022 guidance, now anticipating attaining adjusted EPS between $15.50 and $15.75 (up from $15.25 to $15.55 previously) for the full year.
Valuation is Too High; Dividend is Too Low
Despite Roper’s prolonged and honored dividend growth track record, dividends remain only a token of shareholders’ total-return prospects. The company’s most recent dividend hike was by about 10% this past November. For context, Roper’s 10-year dividend CAGR sits close to an exceptional 17.7%.
That said, with dividends being only a snippet of earnings (the payout ratio stands at 16% according to the present annualized dividend per share and management’s outlook), the stock yields a tiny 0.6%.
The reason for such a low yield besides the company distributing a small portion of earnings is that shares have consistently traded at a premium. Today, shares are trading at a (forward) P/E of 24.8 based on the stock price and the midpoint of management’s Fiscal 2022 adjusted EPS estimate.
While the stock has corrected lately, it remains slightly overvalued, in my view. Management’s double-digit growth guidance may sound bright, but there could be more room for the valuation to be compressed in a rising-rates environment – especially considering that Roper has a substantial net debt position despite its recent deleveraging.
Higher interest rates following future refinances could squeeze profitability. Further, assuming Roper rushes debt repayments to avoid such a scenario, it may have less capital to allocate to acquisitions in the medium term. Thus, its growth prospects going forward may soften – just a risk to keep in mind.
Wall Street’s Take on Roper Technologies
Turning to Wall Street, Roper Technologies has a Moderate Buy consensus rating based on four Buys, three Holds, and one Sell assigned in the past three months.
At $469.75, the average Roper Technologies stock projections suggest 21% upside potential.
Conclusion – Roper May Not be Worth Buying Yet
Overall, Roper Technologies showcases several qualities. These include leading market positions in the niche markets it serves and high-quality, recurring cash flows. The company’s latest results exhibited strong momentum, while management’s guidance is certainly encouraging.
While the recent correction in the stock price could appear like a fruitful buying opportunity, shares could still be relatively overvalued in the current rising-rates environment.
Further, due to the stock’s yield remaining at microscopic levels, dividend returns would not be able to offset any losses from a lower stock price if a valuation compression scenario were to occur.
Still, Roper is likely to retain a strong shareholder base over the long term due to its hybrid shareholder attraction, including drawing both dividend growth and conservative investors. This is likely to sustain the stock during market downturns and boost it further during bull runs.
