When I last analyzed Ecolab (ECL), the company had just come off strong 3rd quarter results with EPS up 16%. Ecolab is a global leader in energy, water, and hygiene services. The company has a market cap of $34 billion and is the largest publicly traded company in the Cleaning Products industry. The company has increased its dividend payments since 1985, giving it a streak of 28 consecutive years of dividend increases. Ecolab is a Dividend Aristocrat and the subject of part 48 of the Dividend Aristocrats In Focus series. The company’s business operations are analyzed below.

Business Overview

Ecolab’s business is divided into four primary segments: Global Industrial, Global Institutional, Global Energy, and Other. Each segment’s percentage of total operating income produced for Ecolab through the first 9 months of the company’s fiscal 2014 is shown below to give an idea of the importance of each segment:

• Global Industrial: 6% of total operating income
• Global Institutional: 1% of total operating income
• Global Energy: 0% of total operating income
• Other: 1% of total operating income

Global Industrial

The Global Industrial segment is Ecolab’s second smallest based on operating income. The segment operates under 4 divisions:

• Global Water
• Global Food & Beverage
• Global Paper
• Global Textile Care.

The Global Water division provides water treatment programs and products under the Nalco name. The Global Food & Beverage Division provides cleaning and health products and services to breweries, soft-drink bottlers, the dairy industry, and the meat and poultry industry. The Global Paper division provides water and process applications to the pulp and paper industry; it also uses the Nalco name. The Global Textile Care division provides washing solutions for the uniform rental, hospitality, and health care industries.

Global Institutional

The Global Institutional segment is Ecolab’s largest based on operating income. The segment breaks its operations into 3 divisions:

• Global Institutional
• Global Specialty
• Global Healthcare

The Global Institutional division (within the Global Institutional segment) provides equipment and cleaning products for warewashing (restaurant scale dish washing), laundry, food-safety, and housekeeping. The Global Specialty segment provides restaurants with cleaning products under the Kay name. The Global Healthcare division provides cleaning and infection prevention solutions to the healthcare industry.

Global Energy

The Global Energy segment is Ecolab’s second largest segment based on operating income. The Global Energy segment operates under the Nalco Champion name. The segment’s operations are divided into an upstream and downstream division. Both divisions serve the process chemical and water treatment needs of the petroleum and petrochemical industries.

Other

The Other segment is Ecolab’s smallest by far. The segment is responsible for just 5% of total operating income. The Other segment provides pest elimination as well as kitchen repair operating services.

Competitive Advantage

Ecolab’s competitive advantage comes from its strong patent portfolio and expertise in washing, cleaning, and water solutions. The company’s research and development team is composed of over 1,600 experts in a variety of fields. The company’s diverse segments give it a unique opportunity to combine researchers in chemistry, automation, biology, engineering, and packaging. The company spent a total of $188 million on research in its full fiscal 2013. Strong research and development spending will fuel the company’s future innovations and growth.

Ecolab is a large company with a market cap of over $30 billion. As a result, it has the funds to take on large scale projects and provide services for the world’s largest companies. Ecolab’s large size and strong cash flows give it an advantage in research over smaller companies in the cleaning and health industry as it can attract the best talent and spend more on research.

Growth Prospects

Ecolab has grown revenue per share at about 10.5% a year over the last decade. The company has managed to grow EPS at 14.5% a year over the last decade. A 14.5% compound growth rate equates to doubly your money about every 5 years.

Ecolab should continue to grow its EPS in double-digits going forward. The company’s waste reduction services will continue to be on high demand over the next decade as companies in the developed world fall under increasing pressure to become more environmentally friendly and operationally efficient. In addition, Ecolab is benefitting from the renaissance in North American oil and gas production. The company will likely see especially strong growth in its Global Energy segment over the next decade.

Dividend Analysis

Ecolab has a current dividend yield of just below 1%. The company’s low dividend yield makes it an unattractive investment for investors seeking current income. With that said, the company’s solid growth prospects going forward give it significant dividend appreciation potential. In addition, the company has a low payout ratio of just 26.3% of expected full year 2014 EPS. Ecolab’s low payout ratio combined with solid growth prospects going forward give it the potential to rapidly grow its dividend going forward.

Valuation

Ecolab is a shareholder friendly company experiencing rapid growth. As one would expect, it trades at a premium P/E ratio. Ecolab currently trades at a P/E ratio of about 26 times expected full 2014 EPS. For comparison, the S&P 500 currently trades at a P/E ratio of about 19.25 expected full 2014 EPS. Ecolab is currently trading at a 1.35x premium to the S&P 500.

Ecolab’s P/E ratio is actually near its 3 year low. Ecolab has traded at a P/E ratio above 30 for much of the time since the beginning of 2012. The company’s P/E ratio is high, but this reflects its excellent growth prospects going forward and shareholder friendly management. I believe the company is  fairly valued despite trading at a high P/E ratio due to its strong growth prospects.

Recession Performance

Ecolab’s services are vital to the businesses it serves. As a result, the company grew EPS each year throughout the Great Recession of 2007 to 2009. The company’s EPS through the Great Recession of 2007 to 2009 are shown below to detail its success:

• 2007 EPS of $1.66
• 2008 EPS of $1.86
• 2009 EPS of $1.99

Final Thoughts

Ecolab is ranked as a Top 40 stock using The 8 Rules of Dividend Investing out of 138 businesses with 25 or more years of consecutive dividend increases without a reduction. The company ranks highly due to strong double-digit revenue per share growth and its low sub 30% payout ratio. In addition, Ecolab has a lower-than-average price standard deviation over the last 10 years of about 24%. The company has performed exceptionally well during recessions and has a strong competitive advantage in the cleaning and water industry.