Some of the best companies in the world are hidden right under our noses.

And I’m always attempting to sniff them out.

I generally relate a lengthy dividend growth record with high quality, as it’s just about impossible for a company to hand out cumulatively rising dividends for decades on end without running a great business.

That’s why I concentrate on investing my personal wealth in companies that can be found on David Fish’s Dividend Champions, Contenders, and Challengers list – a list of more than 600 stocks that have increased their respective dividends for at least the last five consecutive years.

[ad#Google Adsense 336×280-IA]Dividends are paid in cash from cash, and cash unfortunately doesn’t grow on trees. Be nice if it did, however!

To find great investments, I often think about products and/or services that are ubiquitous.

I try to find companies that produce these products and/or services and profit from them.

Even better when they share those profits with shareholders in the form of rising dividend payments.

For instance, think about cleaning and sanitation products.

Boring, right?

Well, maybe.

But how boring is making money?

There’s a company out there that specializes in these products and services and makes a lot of money doing so.

Ecolab Inc. (ECL) provides cleaning and sanitation products and programs, as well as pest elimination, infection control products, dish and laundry washing systems, and kitchen equipment repair systems for the hospitality, foodservice, healthcare, industrial and energy markets across more than 170 countries.

These products and services go practically unnoticed by all but the most astute investors and consumers, but they’re a necessary part of life. Try not cleaning your house for a few months. Now imagine the entire business world like that.

Ecolab provides mundane, but profitable, products like carpet cleaning solutions, cleaning caddies, hand hygiene products, water treatment services, and antifoulants.

What’s particularly interesting about their business model is that it follows the old razor-and-blade setup where you sell the system, but the client has to buy an ongoing stream of products to keep that system working properly. So Ecolab will sell a cleaning system once, for instance, but their customers have to continue to buy solutions to get the end result. This makes for a great source of recurring revenue.

They’re the global leader by market share in the cleaning and sanitation market, which has led to impressive growth across the company.

So let’s look at that growth and see what exactly Ecolab has been up to over the last decade.

The company’s revenue grew from $4.185 billion in fiscal year 2004 to $13.523 billion in FY 2013, which is a compound annual growth rate of 13.66%. That’s a rather robust growth rate across the top line.

The bottom line has grown almost as impressively, with EPS up from $1.19 at the beginning of this period to $3.16 by FY 2013. That’s a CAGR of 11.46%. The EPS growth was slightly subdued in comparison to what they achieved with revenue apparently due to some share issuance.

S&P Capital IQ is anticipating that EPS will compound at an annual rate of 16% over the next three years, but some of that growth is anticipating a strong energy market, which has recently been volatile.

Now, I already mentioned earlier that I stick to investing only in companies that share the wealth with shareholders in the form of rising dividends.

Well, Ecolab does not disappoint here.

The company has increased its dividend for the past 23 consecutive years.

With a growth rate in the core business like they’ve posted, you’d expect generous dividend raises. And that’s exactly what they’ve delivered. Over the last decade, the dividend has been increased at an annual rate of 13.1%.

If there’s one thing that I perhaps don’t like about this stock, it’s the low yield. At 1.27%, that’s not delivering a lot of income now. But you have to keep in mind that the payout is growing rather substantially.

And a payout ratio of just 35% means the dividend raises will likely keep on coming.

020315aThe company’s balance sheet is leveraged a bit higher than I’d personally like to see, but they’re certainly not in any dire straits.

The long-term debt/equity ratio is 0.81 and the interest coverage ratio is 5.76.

Their profitability is solid, with net margin that has averaged 7.17% over the last five years and return on equity that’s averaged 17.47% over that period. It’s difficult to compare this to competitors because Ecolab is really in a class by themselves, but in absolute terms these are good numbers.

Ecolab is truly a global leader in their space. And the services and products they offer will likely remain in high demand for the long haul. Many of their systems and solutions are designed to save their clients money on a necessary service, which drives relationships.

The clients that purchase Ecolab’s products and services – many in the hospitality and foodservice industries – need to maintain a good reputation, as a problem with cleanliness or sanitation can quickly cause a larger problem. Thus, it’s unlikely that Ecolab’s stable revenue base will be impacted severely by any one change in the broader economy, assuming they continue to cultivate their business relationships and deliver on quality and price.

However, there are risks to consider here. Many of its end markets are exposed to macroeconomic changes, though, as aforementioned, Ecolab’s products are a necessary cost of doing business. As a global business, they also face some currency risk, though that’s true for most multinational companies. In addition, somewhat recent acquisitions of Champion and Nalco may be getting away from the company’s core competencies and add risk in the form of additional exposure to the energy sector.

The stock’s P/E ratio of 27.48 seems a bit rich here on the face of it, though this is a stock that typically trades at a rather rich premium – the five-year average P/E ratio is 29.6.

I valued shares using a two-stage dividend discount model analysis with a 10% discount rate and a growth rate of 12% for the first ten years, with a terminal growth rate of 8%. These rates seem appropriate for the business given its impressive track record and relatively stable performance right through the Great Recession. The DDM analysis gives me a fair value of $99.95 for this stock, indicating it’s roughly fairly valued.

scBottom line: Ecolab Inc. (ECL) is the global leader in the cleaning and sanitation market. Their growth is impressive and they’ve been generous in sharing that growth with shareholders in the form of rising dividend payments for almost three straight decades. The products and services they offer are ubiquitous and necessary, and their business model is built for recurring revenue. Ecolab seems like a great stock to potentially clean up your portfolio and deliver increasing dividends for the foreseeable future and beyond.

— Jason Fieber, Dividend Mantra

[ad#DTA-10%]