Cintas: A Quality Buy and Hold Forever Stock at Any Price

Key Points

• Cintas is a high-quality dividend growth stock you can buy at any price. 
• The stock price experiences corrections but is in a long-term uptrend supported by share repurchases. 
• Analysts and institutions buy the stock and may provide support with shares pulling back to critical levels. 

If there is one thing true about Cintas NASDAQ: CTAS, the company delivers results. It has delivered results quarter after quarter, year after year, for more than 2 decades, and it will continue to do so. Since Cintas began paying dividends, the stock price has risen by high triple-digit amounts, and the dividend distribution has doubled more than 5 times and is on track to continue growing. 

Cintas FQ1/CQ3 results align with the outlook it can sustain returns for investors. While tepid relative to the analysis expectations, there are several interesting points long-term investors should consider. Those are growth, margin, guidance, dividends, and what the market thinks about this stock. Based on the analysts and institutional activity, the market thinks this stock is a buy because of the growth, margin, and dividends. 

Cintas Growth Slows, Outpaces Consensus

Cintas FQ1 results are tepid relative to the analysts' consensus but continue to show strength relative to the previous quarter and year. The company reported $2.34 billion in net revenue for a gain of 8.1% compared to last year, in alignment with the consensus and driven 100% by organic sales growth. The Other segment led on a segment basis, with both segments growing at least 7.6%. The S&P 500 is expected to average only 1.5% revenue growth this quarter. 

Margin is another highlight of Cintas' report. The company widened the gross and operating margins by more than 100 basis points to drive a solid gain on the bottom line. The gross margin increased by 11% and the operating income by nearly 14%, leaving the GAAP EPS up $0.31 YOY or about 9%. GAAP EPS was affected by a higher tax rate expected to persist into the coming quarter. Regardless, earnings and the balance sheet make it clear the company’s dividend is in no danger. 

The guidance is also favorable to investors. The company raised the full-year guidance for top and bottom line results, increasing the bottom end more than the top. This puts guidance in a range bracketing consensus and forecasting 6.6% to 8% top-line growth and EPS growth of at least 7.85%, and it may be cautious. Trends suggest the labor market remains healthy if subdued relative to 2021/2022 and has normalized at levels consistent with prepandemic conditions. Cintas was growing then and can continue to grow now. 

Cintas is a Capital Return Machine 

Cintas is a dividend-paying and share-repurchasing company with a long track record for both. The company is a Dividend Aristocrat with a 40-year history of increases compounded by regular share repurchases. The dividend isn’t large relative to the stock price, about 1.1%, but relatively small compared to earnings.

The dividend payout ratio is less than 60% with earnings growth in the outlook, making annual distribution increases sustainable, although the pace will likely slow. Regarding repurchases in Q1, share buybacks were more than $43 million net of stock-based compensation, worth about 0.36% in theoretical yield to investors. 

Analysts Buy into Cintas's capital return program and were driving the stock higher before the Q1 report was released. The 10 analysts tracked by Marketbeat.com rate the stock at Moderate Buy and have been raising their price targets all year. The consensus going into the release is up nearly 5% compared to last quarter and more than 20% YOY and should be expected to trend higher over time. 

The Technical Outlook: Cintas Pulls Back After Solid Results 

The price action in Cintas is pulling back following the Q2 results, but the uptrend remains intact. The stock is in a sustained uptrend that began well before the COVID-19 pandemic and shows no signs of stopping. The risk is for traders; the market may continue to correct within its uptrend and has plenty of room to fall before hitting critical levels.  If the market fails to find support near the 150-day EMA, it could retreat to the $430/$450 region before hitting bottom and firing the next significant entry signal.