As a dividend growth investor, I focus on finding and owning the most financially sound companies in the market that I can. Those companies in a very stable financial position tend to be those that are well run and maintain an advantageous industry positioning, which allows for the possibility of a growing dividend.
In this article, we will examine three companies that are rated very well by GuruFocus in terms of financial strength. All three names also pay a dividend that has increased for at least a decade.
A.O. Smith Corporation (AOS, Financial) is a leader in the manufacturing of water heaters, boilers and water treatment products for both residential and commercial customers. The company’s markets are primarily North America and China. A.O. Smith generates revenue of $2.9 billion in 2020 and has a market capitalization of $10.6 billion.
A.O. Smith receives a very solid 8 out of 10 on financial strength from GuruFocus. The company’s best score relative to its industry is on debt-to-Ebitda. A.O. Smith’s debt-to-Ebitda ratio of 0.24 is superior to 86% of the 1,966 companies in the industrial products industry. Interest coverage outpaces nearly 80% of peers while the debt-to-equity ratio is better than three-quarters of the industry and the cash-debt ratio tops 70% of the competition. A.O. Smith's current scores are near the best numbers of the company’s 10-year history in all of these respective areas.
The lone weak spot is the company’s equity-to-asset ratio, though this is above 59% of the competition and still at the high end of A.O. Smith’s long-term range.
A.O. Smith has raised its dividend for 27 consecutive years, qualifying the company as a Dividend Aristocrat. The dividend had a compound annual growth rate of nearly 21% over the last decade, though this growth rate has slowed to 11.8% since 2016. If the company keeps to its usual schedule, then investors will likely see the next dividend increase in mid-November.
Shares yield 1.6% today compared to the stock’s10-year average yield of 1.2% and the average yield of 1.4% for the S&P 500 index.
The annualized dividend stands at $1.04 and analysts surveyed by Yahoo Finance expect that the company will earn $2.96 per share in 2021, resulting in a projected payout ratio of just 39%. This is higher than the average payout ratio of 29% since 2011, but not close to a point where I am concerned about the company’s ability to continue to grow its dividend.
With shares trading at $67.45 today, A.O. Smith has a forward price-earnings ratio of 22.8 compared to the stock’s average multiple of 21 times earnings since 2011.
A.O. Smith has a GF Value of $53.48, giving shares a price-to-GF-Value ratio of 1.26. The stock would need to fall almost 21% to reach the GF Value. Shares are rated as modestly overvalued.
A.O. Smith is very much on stable financial ground as it scores well on a number of metrics. The company also has a nearly three-decade dividend growth streak going and a reasonable payout ratio. Shares are pricey and the yield is on the lower end, but investors looking for high levels of dividend growth from the industrial sector might be interested in the name on a pullback.
Hormel Foods Corporation (HRL, Financial) is a leading global manufacturer and supplier of meat and food products. The company’s best-known brands include Hormel, SPAM, Jennie-O, Skippy and Chi-Chi’s. Hormel Foods is valued at just under $26 billion today and produced revenue of $9.6 billion in fiscal year 2020 (which ended Oct. 31).
Hormel Foods also receives a score of 8 out of 10 on its financial strength report card. The company’s top metric is its debt-to-Ebitda ratio, which outperform a little more than three-quarters of 1,339 peers in the consumer package goods industry. This is, however, at the higher end of Hormel Foods’ 10-year range. Interest coverage is solid as well, even if this comes up short against what Hormel Foods usually generates.
The equity-to-asset and debt-to-equity ratios outdistance 72% and 70% of competitors, respectively, and also compare very well to its own historical performance. Hormel Foods’ Altman Z-Score, which measures a company’s chances of going bankrupt in the short-term, is well inside the safe zone.
Hormel Foods has one of the longest dividend growth streaks in the market at 55 years, which places the company in the exclusive Dividend Kings. The dividend has had a CAGR of 13.6% since 2011 and 9.9% since 2016. The stock yields 2.1% as of Monday’s close, compared to the 10-year average yield of 1.9%.
Hormel Foods’ annualized dividend is 98 cents and the company is expected to earn $1.73 per share this year, equating to a payout ratio of 57%. The average payout ratio since 2011 is 38%, though that has risen to 48% for the past three years.
Hormel Foods closed the most recent trading session at $47.82. Using analysts’ estimates for the year, the stock has a forward price-earnings ratio of 27.6. Shares have traded hands with a price-earnings ratio of 21.8 since 2011, so the stock is definitely trading with a premium to its historical valuation.
Hormel Foods has a GF Value of $47.08, giving the stock a price-to-GF-Value ratio of 1.02. Shares are rated as fairly valued.
Hormel Foods’ dividend growth is longer than almost any other company in the market and provides a slightly higher than usual yield. Hormel Foods’ payout ratio is in a safe zone, even if it is considerably higher than the long-term average. Lower dividend growth going forward is likely to occur until the payout ratio comes down. Through a historical lens, the valuation looks stretched. Looking at the stock’s intrinsic value, Hormel Foods seems reasonably priced. Investors looking for secure income might find the stock a decent buy.
PetMed Express, Inc (PETS, Financial), founded in 1996, has become one of the largest pet pharmacies in the country. The company, which includes subsidiary 1-800-PetMeds, markets prescription and non-prescription medications through e-commerce primarily, but also through telephone and direct mail channels. The company also sells other health-related products for pets. PetMed Express has a market capitalization of $651 million and had sales of $309 million in fiscal year 2021 (which ended March 31).
PetMed Express receives a perfect 10 out of 10 on financial strength from GuruFocus. The company holds no debt. This puts it well into the 99th percentile of the 602 companies in the healthcare providers and services industry on cash-debt and interest coverage.
The equity-to-asset ratio of 0.75 tops more than 80% of peers and ranks well in comparison to the company’s own history. PetMed Express also scores well on the Piotroski F-score, which is used to determine the strength of a company’s financial position, and the Altman Z-score.
Despite its relative youth, PetMed Express has increased its dividend for 13 consecutive years. Shareholders have seen their dividend payments compound at a rate of 8% over the last decade. The yield of 3.7% is below the long-term average yield of 4.1%, but is nearly three times that of the S&P 500 index.
PetMed Express has an annualized dividend of $1.20. With the company expected to produce $1.59 of earnings per share in fiscal year 2022, the payout ratio is projected to be 75%. PetMed Express is no stranger to a high payout ratio as the average has been 61% over the last 10 years.
With a current share price of $33.91, PetMed Express has a forward price-earnings ratio of 21.3. This compares to the stock’s average price-earnings ratio of 17.1 over last decade.
PetMed Express has a GF Value of $30.42, meaning the stock has a price-to-GF-Value ratio of 1.11. The stock would need to decline 10% to reach its GF Value. PetMed Express is rated as modestly overvalued.
PetMed Express is a leader in a niche business area that is growing. The company also is very strong financially, as evidenced by its perfect score on financial strength. The stock provides a yield that is considerably higher than the market and the payout ratio which, though elevated, isn’t in a dangerous place in my opinion. Investors looking for access to the pet industry might find PetMed Express and its yield attractive enough to purchase even as the stock appears to be a bit ahead of itself.
Author disclosure: the author has no position in any stocks mentioned in this article.