Ecolab Inc. (NYSE: ECL) could be a value investment because it operates in an obscure industry and makes money.
Ecolab provides chemicals, consulting, pest control, sanitation, laundry, and other services and materials to a variety of industries. If you live in the United States, you probably see Ecolab vans on the road.
Demand for Ecolab’s services could grow because of the Coronavirus hysteria. For instance, Ecolab sanitizes cruise ships. Japanese authorities quarantined the cruise ship Diamond Princess in Yokohama after they detected coronavirus onboard, NBC news reports.
Consequently, Ecolab’s business could explode because of the latest disease hysteria. However, Ecolab’s business could shrink if events show Coronavirus is not a threat.
Ecolab Makes Money
Ecolab already makes money from its business. For example, Ecolab reported a $1.605 billion quarterly gross profit on quarterly revenues of $3.824 billion on 31 December 2019.
As a result, Ecolab reported a $560.4 million quarterly operating income and a $429.6 million quarterly net income on the same day. Those numbers were in contrast to $581.90 million and $395.10 million on 31 December 2018.
Furthermore, Ecolab reported a $1.543 billion quarterly gross profit on quarterly revenues of $3.760 billion on 31 December 2018. Thus, Ecolab made more money over the last year.
How Much Cash Does Ecolab Generate?
Ecolab (NYSE: ECL) generates a lot of cash from its business. For example, Ecolab reported a $682.2 million operating cash flow and a $50.2 million ending cash flow on 30 September 2019.
The operating cash flow was up from $664.7 million on 30 September 2018. However, the ending cash flow was down from $149.4 million on 30 September 2018. Thus, Ecolab made a little less cash over the last year.
Ecolab is not a cash-rich company because it had $186.4 million in cash and short-term investments on 31 December 2019. That number was up from $114.70 million on New Year’s Eve 2018.
Ecolab has little cash because of the nature of its business. To explain, Ecolab’s money is tied up in assets such as chemicals, labs, vehicles, and factories. Thus, Ecolab has little cash left over at the end of the day.
Is Ecolab a Good Dividend Stock?
I think Ecolab is a decent dividend stock because it paid a 47₵ dividend on 16 December 2019.
I think the dividend gives Ecolab (NYSE: ECL) a high-margin of safety. Thus, Ecolab is a safe investment because it some cash income.
Overall, each share of Ecolab offered a dividend yield of 0.91%, an annualized payout of $1.88, and a payout ratio of 0.00% on 19 February 2020. Thus, I think Ecolab is a reasonable dividend stock.
However, I think Mr. Market overpriced Ecolab at $210.31 on 19 September 2020. Thus I think investors need to avoid Ecolab at the current price. Instead, I think investors need to wait until Ecolab falls below $100 to buy it.
What is Ecolab’s Future?
Ecolab could make more money because of disease scares. However, lack of cash could threaten Ecolab’s future operations.
For instance, a recession could force Ecolab could to borrow money to stay in operation. Under those circumstances, Ecolab could lose money if interest rates rise and increase the cost of debt.
In that scenario, a lack of cash could force Ecolab could to sell itself to a hedge fund or Berkshire Hathaway (NYSE: BRK.B). To explain, Berkshire Hathaway is a cash-rich company that operates like a hedge fund.
To explain, Berkshire makes lots of money from value investments and vests it in enterprises such as Ecolab. This business model is lucrative. In fact, Berkshire Hathaway reported $74.766 billion in cash and short-term investments on 30 September 2019.
Ecolab is an Acquisition Target
Therefore, I consider Ecolab an acquisition target because of its lack of cash. Hence, speculators could make money by shorting or buying and holding Ecolab.
On the other hand, Ecolab’s dividend could disappear quickly because the company could run out of cash. Thus, large dividends are good for the company, but bad for investors.
Hence, Buffett’s strategy of paying no investment and saving lots of cash is smart. Notably, cash-rich tech giants such as Amazon (NASDAQ: AMZN), Alphabet (NASDAQ: GOOG), and Facebook (NASDAQ: FB) are following Buffett’s lead and not paying dividends.
Given that reality, Americans need to ask if we want that much money accumulating in Silicon Valley, Seattle, and Omaha. Perhaps we need to follow former presidential candidate Andrew Yang’s (D-New York) suggestion and force companies to pay a dividend to all Americans.
In the final analysis, I consider Ecolab a good stock that is not a value investment. Ecolab is a good stock because it makes money and pays a good dividend. However, Mr. Market overprices Ecolab, which makes it a bad risk for most investors.