3 Reasons to Buy Cintas

By Markets Fool.com

There's been a lot of news surrounding uniform renterCintas(NASDAQ: CTAS)in the past couple of months. From the company's announced acquisition of a major competitor to a big dividend increase, the company's situation is certainly changed -- in a good way.

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Here are three reasons Cintas might deserve a spot in your portfolio.

Cintas rents uniforms to businesses of all types. Image source: Getty Images.

The big dog just got bigger

Cintas is the undisputed market leader in North American uniform and floormat rental, with nearly a million customers.And while the company also has a burgeoning fire and safety business, the rental business comprises 77% of the company's revenue.

The total North American market for uniform rentals is worth approximately $16 billion, and Cintas controls about 25% of it. To put Cintas' size in perspective, its three largest competitors in this space -- Aramark (NYSE: ARMK),UniFirst(NYSE: UNF), andG&K Services(NASDAQ: GK) -- combine to control only about another 25%. The rest of the market is fragmented among many other smaller local or regional players.

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But Cintas is about to get even larger with the full acquisition of G&K, which was announced in August. G&K controlled about 6% of the overall North American uniform rental market; this move is expected to add 170,000 new customers to Cintas. That should result in the company's controlling nearly one-third of the entire North American market.

This is great for Cintas, because it solidifies its standing in the undisputed top spot. Size and scale really matter in this kind of route-based service business, since the fixed cost of deliveries can be spread out, while there isn't much room for differentiation in the product. So even though Cintas paid a premium of about 20% for G&K, it expects that investment to pay off. Specifically, the company expects to achieve cost synergies of $130 million to $140 million within four years of the transaction's close, and accretive to EPS within two.

The dividend gets bigger, too

Earlier this month, Cintas' board of directors approved a $1.33-per-share annual dividend. That represents an impressive 26.7% increase over the prior year's annual dividend of $1.05 per share.

Cintas Chairman and CEO Scott D. Farmerexplained that the company's strong performance led directly to its strong dividend:

We achieved record revenue and earnings per share in fiscal year 2016. Our strong performance continued into the first quarter of fiscal 2017. As a result of our excellent financial results, cash flow, and financial position, we are pleased to announce an increase in the annual dividend for the 33rdconsecutive year. The annual dividend is an important part of our capital allocation strategy and illustrates our enduring commitment to effectively deploying cash to increase shareholder value.

Although this was the highest-ever percentage increase in Cintas' dividend, the company has regularly upped its annual dividend by double-digit percentages. In fact,Cintas has raised its dividend by at least 18% in four of the past five years, including 2016.

Attractive share price

In spite of all this recent positive news, the stock price has been on the decline, from a high of more than $119 per share in September to just over $105 as of the market close on Oct. 27.That means the stock is currently trading at a discount to the price prior tothe G&K acquisition announcement, a deal that should almost certainly add value to the company.

While I wouldn't go so far as to call the company "undervalued" -- its PE has been artificially depressed by its 2015 sale of Shred-It, and its enterprisevalue-to-EBITDAmultipleis merely in line with its peers Aramark and G&K -- the fact that it's trading lower today than before it announced the G&K acquisition may indicate short-sightedness on the market's part. With the company's new-and-improved annual dividend payable in December to shareholders of record as of Nov. 4, 2016, now may be an excellent time to jump in and reap the benefits.

Investor takeaway

I like to invest in "top dog" companies that are market leaders. Cintas not only qualifies but has also become an even bigger dog through its acquisition of G&K. And while the full fruits of that acquisition may not show up on the bottom line for a few years, the company's attractive dividend and history of dividend increases give investors a compelling reason to stick around. Cintas is a buy.

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John Bromels owns shares of Cintas. The Motley Fool recommends Cintas. 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.