Rockwell Automation: 5 Things All Investors Should Know That Will Affect Dividend Growth

Rockwell Automation just announced better than expected earnings and a blowout quarter of free cash flow growth. During its conference call, managementdiscussed both avenues of strong potential growth but also two important headwinds that could make 2015 a challenging year for this midcap industrial dividend stock.

Booming sales in Latin America represent one of the few bright spots for sales growthFrom CEOKeith Nosbusch:

With just 8.5% of sales coming from Latin America this quarter, this fast-growing region likely represents the company's best growth prospect in the years ahead. Among other markets, only Canada, representing 6.4% of total sales, showed much growth over the last quarter, with sales rising 8.2%. Meanwhile, sales in the U.S., Asia,, and the Middle East and Africa were largely flat with 0%, 2.9%, and negative 1.1% growth, respectively.

Strong dollar is a growing headwind to growthNosbusch:

Euro to US Dollar Exchange Rate data by YCharts.

As this chart shows, the U.S. dollar has surged in the last year. That's bad for Rockwell because its products and services become more expensive to foreign buyers.

Management expects a strong dollar to shave about 4.5% off its sales growth in 2015. Rockwell is only guiding for 2.5% to 5.5% organic sales growth, meaning the rising dollar could consume between 82% and 180% of revenue growth.

In fact, management now projects 2015's midpoint sales and earnings per share to represent a decline of 3% and growth of 7.8%, respectively, compared to 2014.

Oil price collapse hasn't effect Rockwell ... yetNosbusch:

While sales to the oil and gas industry make up only 12% of Rockwell's revenue,some customers, such as oil companies that produce both onshore and offshore oil, will almost certainly be affected by the deepest collapse in petroluem prices since the financial crisis.

Weak oil prices reflect a moderate risk to sales growthNosbusch:

This quote highlights the fact that for a slow-growing company like Rockwell, decreased sales from the oil and gas industry might result in earnings misses in 2015. Current and potential investors should be aware of this when making investment decisions and not act too hastily because of quarterly numbers.

Buybacks and dividend growth are key to Rockwell's long-term investment thesisCFO Ted Crandall:

Crandall's words indicate Rockwell, which had 139 million shares outstanding at the end of 2014,plans to buy back at least 3 million shares this year, representing 2.2% of the outstanding share count. This continues Rockwell's long and consistent track record of stock buybacks, which, assuming the share count ends 2015 at 136 million, would represent a compound annual share reduction of 3.13% since 2005.

ROK Average Diluted Shares Outstanding (Annual) data by YCharts

Buybacks are important to Rockwell investors because given the company's slow growth, strong share count reduction is required for the company to grow its earnings per share, or EPS, and free cash flow per share; which fuels dividend growth. For example since 2006, Rockwell's total returns have been 11% per year versus 7.9% for the S&P 500.

That out performance has come largely from the fact that EPS has grown 114% over the last 10 years, or at an annual compound rate of 7.9%. Even more impressively, free cash flow per share has grown at a 9% compound rate.Thus despite anemic sales growth of 2.8% over the last decade, Rockwell has been able to achieve 12.8% dividend growth yet keep the free cash flow payout ratio a safe and sustainable 34.4%. Even with the company's aggressive buybacks, the total free cash flow shareholder payout ratio -- dividends and buybacks -- is still only 91.5%.This means that Rockwell can continue reducing share count and growing dividends aggressively without dipping into its cash reserves or taking on debt.

The takeaway: headwinds ahead in 2015, but Rockwell's long-term investment thesis remains intactRockwell Automation might face challenges ahead in the forms of a strengthening dollar and lower sales to the oil and gas sector, but management believes it can attain EPS growth rate similar to what it saw in 2014. Its CFO said the company remains committed to returning cash to shareholders in the form of significant buybacks, which should help it grow EPS and allow for continued dividend growth. Thus, while Rockwell isn't likely to set your portfolio on fire like some high-flying growth stocks, I believe it can continue to beat the market when it comes to long-term total returns.

The article Rockwell Automation: 5 Things All Investors Should Know That Will Affect Dividend Growth originally appeared on Fool.com.

Adam Galas has no position in any stocks mentioned however covers Rockwell Automation as a paper portfolio holding for The Grand Adventure dividend project.The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.