Roper Technologies: The Best-Performing Dividend Aristocrat for the Past 2 Decades Is Not a Good Investment Today

Introduction

Roper Technologies Inc. (ROP) has been the best-performing Dividend Aristocrat over the last couple of decades.  However, Roper is not your typical dividend growth stock.  In fact, in many ways I believe the company is better thought of as a growth stock.  Nevertheless, growth is a great asset to possess in every investor’s toolbox.  Thanks to the power of compounding, it’s hard to lose money over the long run when investing in a consistent above-average grower. Roper Technologies Inc. is a classic example.

In the FAST Graphs analyze out loud video below, I will provide a by-the-numbers look at Roper Technologies Inc’s fundamentals.  My objective will be to clearly illustrate where and how its performance has been generated.  Although this is not a household name, it’s a very interesting company that turns most of its operating cash flow into free cash flow thereby providing it a consistent engine for growth.

Measuring Performance without Simultaneously Measuring Valuation Is a Job Half Done

Dividend Aristocrats are typically thought of as superior dividend income generators.  However, many of them have also outperformed the S&P 500 on a capital appreciation basis as well.  Since the beginning of 1999, approximately 75% of the Dividend Aristocrats have outperformed the market over the long run solely on a capital appreciation basis.  However, 100% of the Dividend Aristocrats have outperformed the S&P 500 on a total dividend income paid basis over that time frame.  Therefore, it should be obvious that high-quality blue-chip dividend paying stocks tend to be better-than-average long-term investments.

Moreover, from a total return perspective, there are numerous Dividend Aristocrats that have produced double-digit total returns since 1999, while the S&P 500 has only averaged a 6% annualized total return.  However, Roper Technologies Inc. has outperformed all others by a significant margin.  On the other hand, this best-performing Dividend Aristocrat also offers the lowest current yield than any of its counterparts.  Perhaps even more interestingly, this Dividend Aristocrat has been one of the fastest growing, but not the fastest growing Aristocrat.

The point I’m driving at is that when evaluating performance, it’s very important to recognize and understand precisely how that performance was generated.  Over the years as a value investor, I have emphatically stated many times: “measuring performance without simultaneously measuring valuation is a job half done.”

Over normal times, or when the market is behaving rationally, long-term performance will primarily be a function of how well the business performs on an operating basis.  In other words, there is an indisputable long-term correlation between business results and stock price movements.  Additionally, if the company pays a dividend, dividends will also be related to the company’s operating achievements.

On the other hand, when the market is behaving in an irrational manner or during abnormal times, long-term performance can be skewed by either overvaluation or undervaluation.  I believe it’s critically important that investors understand how valuation has impacted the performance on their individual stocks as well as their overall portfolios.  This clarity of understanding will mitigate irrational fear in a bear market or investor complacency in a bull market like we have been experiencing recently.

FAST Graphs analyze out loud video: Valuing Roper Technologies Inc. in Multiple Ways

There are numerous ways to examine and then ascertain the fair value of a business public or private. I am often asked what I think is the best metric to use when trying to determine fair value. My answer to this question is simple and straightforward. I believe that investors should evaluate any stock they are examining over as many valuation metrics as they can. Therefore, my stock answer is to utilize every valuation resource at your disposal.

On the other hand, there are often certain metrics that apply best to specific companies.  In the case of Roper Technologies Inc., I believe the best metric to evaluate valuation with is EBITDA.  As I will illustrate in the video portion, Roper Technologies Inc. is unique in that the vast majority of its operating cash flow is free cash flow.

Summary and Conclusions

if you judge a stock investment solely on its historical price performance, it becomes very easy to overlook important reasons why the performance has occurred.  If significant overvaluation is involved, you can fall into a complacency trap and ignore the risks that you are facing going forward.  In contrast, if significant undervaluation is involved, you can easily see risk when in fact opportunity is being manifest.  Consequently, the moral of the story is to make sure you measure fundamentals relative to recent price action.  It is only through an evaluation of understanding of both the true insight can be had.

Disclosure:  No position.

Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.

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