Filtering Great Dividends

Investing In Pollution Control Systems Companies

 

Pollution control systems companies are serious businesses that engage in the design, development and implementation of consumer and industrial pollution control products such as air and water filtration systems, dust collectors and various scrubbers. While the business at first glance might scream boredom they do provide very essential services that enhance all our lives.

 

In fact, pollution control systems have been in the news a lot recently with regard to an irritating factory exhaust emanating from Huy Fong Foods, makers of the popular Sriracha Chili Hot Sauce based in Irwindale, California. For those who are not familiar with the story, sriracha factory neighbors complained about a strong smell and eye and throat irritation as a result of the chili sauce manufacturing process. While the story often made for entertaining headlines, the suffering endured by neighbors was no laughing matter. While lawyers battled out in court over the legal right of Huy Fong Foods to continue to produce its chili sauce, the case essentially centered on the factory pollution control system and air filtration system and scrubbers.

 

 

Another example of the importance of the pollution control industry made headlines last week as the South Coast Air Quality Management District in California announced that cancer risk from air pollution dropped in Southern California by as much as 65% since 2005. No doubt this was largely in part of increased regulations, cleaner burning diesel fuels and pollution control systems outfitted on many cars, trucks, cargo ships, locomotives and airplanes.

 

Of course, being dividend income investors we are most interested in the companies that can pay reliable and rising dividends over time. That being said, let’s review the few dividend paying companies in the pollution control industry.

 

First up is CECO Environmental Corp. (CECE). Based in Cincinnati, Ohio, CECE provides various air and water pollution control systems as well as pollution recovery services. The company also manufactures and markets components for industrial air systems such as filters and ducting. CECE currently yields 1.80% with a low payout ratio of 24.7% based on current cash flow. While not a high yielding stock, CECE does offer a very safe dividend. I would like to see a longer dividend history with this stock but so far dividends have been increasing steadily since 2011. On a valuation note the stock has a current PE of 36.74 which is high relative to the market as a whole but in line with industry peers. Forward PE looks a lot more enticing at only 11.67.

 

Next is Donaldson Company, Inc. (DCI). Based in Minneapolis, Minnesota, DCI manufactures and sells various filtration systems. Operating in two distinct segments (engine and industrial), their engine products includes air filters, emissions and exhaust systems for cars, trucks and even your riding mower while their industrial products offers dust, fume, and mist collectors as well as specialized air and gas filtration systems used in the manufacturing process of computer hard drives. See, the pollution control systems industry touches all our lives from cars, trucks, hard drives and even your lawn mower. DCI currently yields 1.60% with a relatively low payout ratio of 37.3%. This stock has experienced and amazing 29 years of dividend growth with a ten year annualized dividend growth rate of 18.38%. This is a stock that every dividend growth investor should consider. The PE for DCI is 22.63 with a more attractive forward PE of 18.35.

 

Finally, in the pollution control space we have Federal Signal Corp. (FSS). Based in Oak Brook, Illinois, FSS manufactures various street cleaning vehicles as well as sewer cleaning vacuum trucks primarily to municipal and government customers and industrial contractors. FSS currently yields a low 1.00% with a very low payout ratio of just 14.0%. While having a rocky on and off dividend history paying distributions since the 1980s, it does sport a very low PE of 11.69 with a forward PE that’s not much higher. FSS also, provides diversity as it also manufactures fire and rescue safety equipment, sirens, vehicle light bars, emergency vehicles and other first responder products.

 

Clearly, the choices in this sector are few from a dividend stock perspective. However, one stock in particular emerges as a potential candidate for any dividend income portfolio. DCI, with its long rising dividend history, reasonable yield and low payout ratio along with a decent PE might make any dividend income investor very happy in years to come.

 

As you can see, we all depend on these companies to detoxify our polluted world. There’s no question that the products and services these companies provide will be needed for decades to come. Have you ever thought about investing in this sector? Please let me know below.

 

Disclosure: Long NONE

Image courtesy of: Sira Anamwong at FreeDigitalPhotos.net

22 thoughts on “Filtering Great Dividends

  1. DivHut,

    filter systems and the likes surely are a interesting business opportunity. Water filters look pretty promising in my opinion. I like your thought process on this topic.

    My personal approach to investing in this branche is diferent, though. Most of the pure play companies are tiny and seem risky to me. That’s why I choose bigger companies that have a nice life science exposure like Danaher (DHR), which I own.

    Figuring out which filters and trends are the most lucrative is a job I like to leave for the DHR management. They will develop or buy the technologies needed to succeed.
    Grow Independent recently posted…Today’s buy: British Petrol (BP)My Profile

    • Hi GI,

      The companies mentioned in this article are definitely small by market cap and they may very well be takeover targets one day or simply stay small niche companies for the long run. I can understand your reasoning for opting to invest in the larger companies in this sector, if nothing else, simply for some added stability. Still, DCI emerged as a new company for me to look into especially since it is the largest of the three and has the longest and most enticing dividend history as well. Thanks for stopping by and commenting.

  2. Hi Divhut,

    I agree that pollution control system might have a bright future as we humans keep destroying our planet. Water filtration too I guess.

    I also agree with Grow Independant that even though “we know” it’s something that should have more and more importance in our society, picking the right one is often hard. Warren Buffett reminds people to invest only in what they understand. On this, his strategy of picking companies with the greatest economical moat sounds good to me.

    DCI seems like an interesting one at first glance even though it’s p/e is still a little high. It’s been there for a while and it’s dividend growth history is impressive. And while its p/e appears high, it is actally lower than its 5 years aversge. Also, its dividend is currently higher than its 5 years average and its p/b, p/s, p/free cash flow ratios are pretty in line with averages.

    Its dividend as been a hefty 42,9% last year, 26,4% on average over the last 3 years, 17,6% over the last 5 years and you already disclosed its 18,4% average dividend growth rate of the last 10 years.

    I think that even its p/e is over the proverbial 20, we have to see that 20 as a rule of thumbs. Its industry peers have a p/e of +/- 19 right now based on mornigstar data… I’d have to make more reasearch but with a forward dividend of 18,35 and such dividend growth prospects, I definitely agree with that it is a stock worth considering. Thanks for bringing it back to my mind 🙂

    By the way, this reminds me that I actually created a list of dividend champions who have increased their dividend at a rate of at least 8% or more over the last ten years and DCI was included in that list.

    Here’s the list in case you’d be interested http://quityourdayjob101.com/2014/08/monster-list-achieve-dividend-growth-8/

    Thanks
    Allan recently posted…How to analyze REIT (real estate investment trusts)My Profile

    • Hi Allan,

      Thanks for the detailed overview of DCI. I fully agree with you that even though a company might have a PE over 18 or 20 or whatever line you draw in the sand, it shouldn’t preclude you from investing in it especially since it has such a long and rich dividend history. Of the three companies mentioned, DCI clearly stands out as the leader in the space from a pure play perspective and warrants more research.

      That’s a great list you compiled by the way for dividend growth rates over 8% for the last ten years. I have never heard of DCI before I wrote this article and their dividend history is certainly impressive which is why I was surprised that it hasn’t popped up on other DGI blogger radars. Thanks for stopping by and commenting and sharing your analysis as well.

  3. Divhut,

    Thanks for posting the article I asked about. Its cool to see the companies that are purely doing pollution controls, but as Grow Ind. said they will probably remain small or get bought. Either way, they fill an important niche, and one that will probably only grow as other nations shift towards tighter regulations promoting cleaner air and environments (especially ones like China, India, etc.).

    I almost wish I still had my CECE stock as it has grown dividends since I first had it, then got rid of it. Of the other 2, DCI looks like a real good investment, and I plan on putting it on my watch list.

    Thanks again,
    Gremlin

    • Hi DG,

      There’s no doubt that each company mentioned fills an important niche that touches all our lives and actually improves upon it. I was surprised to see how far reaching these companies are in terms of their product line as filters for lawn mowers and hard drives are manufactured by them. They seem to go well beyond the air filter and exhaust offerings.

      While two of the companies are very small, DCI seems to be of decent size and the “big boy” in the space, from a pure play perspective. I was surprised to learn about DCI as I never heard of them even though it has a very long and rising dividend history that any DGI blogger would love. Thank you for commenting and sharing your CECE experience as well.

    • Hi R2R,

      As you know I think it’s fun compiling investment ideas by themes anyone can understand or relate to. Each of the companies were new to me as well and DCI seemed to be an interesting pick from a dividend perspective. It certainly has the dividend history behind it. Thanks for stopping by.

    • Hi Tawcan,

      You are very welcome. That’s part of the fun when you blog… introducing new companies and investing ideas you may not have heard or known of. Thanks for stopping by and check out DCI.

  4. DivHut,

    Wow I thought I was going to see an article about Starbucks or Green Mountain with that title. Anyway, I was just noticing that FSS has been cutting its quarterly dividend from $.20 to just $.03 a share over the past twelve years. That seems unusual for a company paying out so little of its income. Maybe they have been using their earnings to try and grow their business.

    MDP
    My Dividend Pipeline recently posted…Kraft raises dividend 4.76%—New yield is 3.95%My Profile

    • Hi MDP,

      I saw that too which is why I mentioned their rocky on and off dividend distribution. Perhaps management is very conservative with its payout policy. From these companies, clearly DCI possesses the qualities of a solid long term dividend payer in a very unique industry that touches all our lives. Thank you for stopping by and commenting.

  5. That is a list that is probably not thought about very much. A very unsexy business/industry to be in. All necessary though.

    Will need to look into DCI at least, even though it has a lower starting yield than I like. May be a good candidate for some funds on a pullback, when it gets close enough to buy a small position.

    Take care!
    ILG recently posted…Recent BuysMy Profile

    • Hi ILG,

      Sometimes the best businesses are the ones with the least sex appeal. Quiet, under the radar doing what they do all the while pumping out profits and dividends. I agree that DCI is an interesting potential candidate. I’d look past the low yield and focus on the stellar annualized dividend growth rate. DCI seems to possess a lot of the metrics dividend growth investors love. Thanks for stopping by and commenting.

  6. Keith,

    I’ve looked at a couple of stocks in this space before. I was actually just writing about CLARCOR Inc. (CLC) the other day after they raised their dividend by 17.6%, making it 31 consecutive years of dividend growth. I’m pretty sure they have the longest dividend growth streak in this space (and worthy of consideration), although their dividend growth rate isn’t as high as DCI.

    It appears to me that DCI and CLC are the best stocks/companies in this space. I definitely wouldn’t mind being invested in this area. A necessary product that has to be replaced. What’s not to like?

    Thanks for the rundown!

    Best regards.
    Dividend Mantra recently posted…Income/Expenses For September 2014My Profile

    • Hi DM,

      You hit it on the head when you wrote, “A necessary product that has to be replaced.” Those are some of the best businesses to be invested in. Thanks for the mention on CLC too. It really looks like another solid payer in the pollution control space. As you mentioned the DCI dividend growth rate is phenomenal too and I think it would make many dividend income investors happy over time. Let’s see what Mr. Market does going forward. The market has been on a crazy roller coaster ride as of late and perhaps better buying opportunities lay ahead for this and other sectors. Thanks for stopping by and commenting.

  7. Hmm, I was way off on the topic for this one! Thought it was going to be about water filters, like Brita. But then I remembered that Brita is part of Clorox…

    Clearly, I know almost nothing about this sector! DCI does look interesting, though.

    Thanks for making these lists and coming up with the creative titles! They’re a lot of fun to read 🙂
    Seraph recently posted…Recent BuyMy Profile

    • Hi Seraph,

      Happy you are enjoying my posts. The pollution control industry is definitely an interesting one as it produces products that are necessary and always need to be replaced. The magic formula for any successful business. DCI has a very long term dividend history and numbers that many dividend bloggers seek out for their portfolios. I think a closer look into that name is deserved. Thanks for stopping by and commenting.

  8. Thanks for the analysis. I’ve never heard of any of these companies, so thanks for thinking out of the box and researching some lessor known companies. After I build up my core positions, I’ll be looking into diversifying in areas such as this. Thanks again!

    Special Agent Dividend

    • Hi SAD,

      I fully understand and agree with your premise of wanting to build out a core portfolio before considering adding “fringe” dividend payers. DCI might make the best bet of the three companies mentioned. They have a great long term dividend history and a very impressive annualized dividend growth rate as well. Sometimes by thinking outside the box you come upon some hidden dividend gems. Thank you for your comment.

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