3 Industrialists Paying Dividends Near 52-Week Lows
I am always on the lookout for opportunities to rotate capital whenever the market presents the opportunity. In the current environment, we have sold some of the high cost energy investments and rebuilt our liquidity. It’s pretty rare that I completely liquidate a position unless I think the business model or potential investment thesis no longer makes sense.
A recent example of why we would eliminate a position can be seen with the sale of all Mesabi Trust (MSB) shares from our retiree Jane’s portfolio. The Trust’s royalties are in question because Cleveland-Cliffs (CLF) is going to idle all Northshore Mining operations due to the “ridiculous royalty structure we have in place with the Mesabi Trust”. CLF is completely moving its production to another site and they haven’t engaged in meaningful dialogue on the royalty structure, which suggests a pretty bleak outlook for the trust in the near future.
When we sell these stocks, I usually check my watchlists to see if there are any stocks not currently held that are worth investing in. This typically occurs when the existing holdings in the portfolio appear fully valued or there is a full position associated with a particular investment.
Manufacturers on the watch list
The current environment has opened doors for entry points in stocks near 52-week lows. In many cases, these stocks were near their 52-week highs over the past six months.
- Air products and chemicals (APD)
- Parker-Hannifin (PH)
- RPM International (RPM)
The purpose of this list is to provide a brief overview of the company and several of the metrics that we consider particularly important when investing in dividend-paying stocks.
Air products and chemicals – APD is one such company that recently hit its 52-week high as recently as early January 2022. The decline in share price has been staggering and largely due to inflationary concerns which are particularly prominent with APD which has a large backlog. ODA price targets were recently lowered:
- BMO Capital – $383 to $280 – Outranking reduces market performance
- Bank of America – $337 down to $285 – Neutral
The good news is that even with these price target cuts, the current stock price is well below these target prices and Fastgraphs shows us that the stock is again reasonably priced using a P/E ratio. 10-year average of 23.5X.
The red line in the image above represents the dividend yield (with percentages linked to the numbers on the right side of the image). When investing in a dividend-paying stock, I’m always concerned about buying stocks when the yield is too low. Buying low-yielding stocks is one of the fastest ways to destroy value over the next few years, because even the rapidly growing dividend will take years to return to what I would call a yield of reference or average.
The image below illustrates this point for APD over a 10-year history. From the middle of 2020 to the end of 2021, the share price reached an all-time high, which caused the dividend yield to drop well below 2%. I’ve drawn the red line to show that on average the 2.5% dividend yield represents a reasonable entry point for APD and that the current stock price represents the best buying opportunity since the start of the pandemic in 2020.
The current dividend yield with the recent dividend increase is closer to 2.84%, making stocks even more attractive.
When we factor in 39 years of consecutive ODA dividend increases and an average dividend growth rate of 12.63% (over the past five years), it further confirms why buying stocks is a convincing argument.
Parker-Hannifin – PH is another stock that has been on my radar for a while (my clients current position has exploded after buying stocks close to their five-year low. PH is a bit different from my usual picks because its dividend yield is low compared to PH is a mature company in the sense that it has been around for a long time, but its low dividend yield and rapidly growing earnings are more like a young, rapidly growing company. extremely low (especially compared to the business model it used to be).
PH’s share price is currently not that far from the all-time high reached just a few months ago. The current payout ratio is below 25% and would be considered extremely safe, which will undoubtedly lead to larger dividend increases in the future. The five-year dividend growth rate of just over 10% is very compelling, especially considering that earnings are growing at close to double digits and can therefore support this kind of rapid dividend growth.
Over the past ten years, PH has really come with a dividend yield of less than 1.60%. If the business were to grow at a much slower rate, then the higher return would be much more justified, but the reality is that the fundamentals of PH show that the business is growing too quickly for the return to be as high as it wasn’t a few years ago. since.
Even if we continue to use the average P/E ratio of 17.09x, we can see that Fastgraphs is growing the stock at an annualized rate of return of just over 12%.
RPM International – RPM is the newest addition to my clients’ taxable account, as stocks recently rebounded from their 52-week low. Personally, I engage in a significant amount of home renovation work and I can even say that I have already done a complete renovation of our old residence. Some of the most common products I come across are part of the RPM International portfolio.
I can easily recognize at least 50% of the marks in the lower left quadrant.
RPM is currently benefiting from increased demand from the professional construction and DIY segment. With house prices at record highs and the threat of rising interest rates, consumers are faced with the question of whether or not to sell and buy a new home or fix/upgrade the one. where they currently live.
RPM is the conservative choice for those seeking modest growth (although it should be noted that 2022 appears to be a tough year for earnings estimates). The current dividend growth streak has been active for 48 consecutive years and over the past five years, RPM has recorded a modest dividend growth rate of 6.3%. RPM also maintains a reasonable payout ratio of 43%. All of these factors combined suggest that RPM is capable of some growth and modest dividend increases.
The image above provides a snapshot of the projected weakness in fiscal year 2022. The good news is that EPS is expected to increase significantly in fiscal year 2023 and 2024. If the dividend growth numbers on Fastgraphs are also accurate, we expect the payout ratio to drop to 33% by the end of 2024, even taking into account low to moderate dividend increases.
I believe the current price is near a good entry point (strongly encourages adding stocks in the mid to upper $70s) and the dividend yield chart shows that a shift has occurred in 2019, where the yield pushing 2% is often a ceiling when it was the floor for the lowest rate.
When we look at the expected growth of RPM with a 10-year average P/E ratio of 20.82x, this would translate to annualized returns of almost 16% over the next two years.
As always, you should always do your due diligence, as there are often external factors that could have a major impact on the information presented in this article. For example, I have a few holdings that are already priced perfectly because they are being merged and/or acquired.
The stocks above are mentioned because they are all currently on my buy list (my clients and I both added or established a position in APD and RPM last week). Although we are patiently waiting for a better entry point in PH, I think the three stocks mentioned have the potential to easily deliver 10% Ann RoR over the next two years.
My clients John and Jane have long been APD, PH, RPM