Investors looking for a mixture of growth and income should take a look at industrial-focused Fastenal (FAST 0.77%). It's not a household name, but it has an incredible dividend record. And here's the best part: It looks at least reasonably priced today. Paying a fair price for a great company like this can work out very well over time. Here are some charts and tables to highlight the opportunity.
1. How fast?
Fastenal has increased its dividend annually for around a quarter of a century. Over the past decade, the average annualized dividend increase was a very robust 12%. But rapid dividend growth has actually been a fairly consistent pattern. To get a good idea of just how powerful that is, take a look at the graph below, which looks at dividend growth from the start of 2000 to the current dividend rate of $0.35 per share per quarter.
FAST Dividend Per Share (Annual) data by YCharts.
You might need to do a double-take. The 49.5K% listed to the far right of the line translates into 49,500%, which is astronomical dividend growth. To be fair, it is highly unlikely that Fastenal will repeat that feat, given that it is a much larger company today than it was back in 2000. However, continued strong dividend growth over the past decade shows that this dividend stock is still returning material value to shareholders via dividend growth.
2. Expanding in more ways than one
Dividends don't come out of nowhere; they require a company to be growing over time. As the chart below shows, earnings per share have been heading steadily higher at Fastenal over the past decade, along with the dividend.
FAST Dividend Per Share (Annual) data by YCharts.
But notice the orange line on the graph, which is the payout ratio. It has bounced around a little from year to year but has mostly fallen within the 60% to 70% range. That's a completely reasonable payout for a large industrial company (it has a roughly $30 billion market cap) with a business that sells lots of small parts to a fairly loyal customer base. In other words, Fastenal appears to be growing nicely and managing its dividend policy in a reasonable fashion.
3. Executing a plan
One of the main goals Fastenal has been working toward is building stronger customer relationships. That's involved a shift from business locations that sell to multiple customers and toward what it calls "onsites." These are locations that are physically within a customer location, or that only serve a single customer. For lack of a better description, onsites are vending machines for frequently used parts.
|
2017 |
2018 |
2019 |
2020 |
2021 |
2022 |
1Q 2023 |
|
|---|---|---|---|---|---|---|---|
|
Branch |
2,383 |
2,227 |
2,114 |
2,003 |
1,793 |
1,683 |
1,660 |
|
Onsite |
605 |
894 |
1,114 |
1,265 |
1,416 |
1,623 |
1,674 |
Data source: Fastenal.
From the table above, you can see quite clearly that it has been shifting models at a steady clip. And, when you consider the points from above, it has been doing this while expanding earnings and dividends. It's nice to see a management team lay out a plan and execute it at a high level. As long as the company can keep living up to its own goals, there's no reason to believe that growth will materially slow anytime soon.
4. Rock solid
Now, none of the above would be possible if Fastenal was financially weak. This is why investors looking at dividend stocks should always consider a company's balance sheet. In this case, there's only positive news to report.
FAST Debt-to-Equity Ratio data by YCharts.
For starters, Fastenal's leverage is really modest, with a debt-to-equity ratio of just 0.12 times or so. And it covers its trailing-12-month interest expenses by over 100 times. Even if the company faces hard times, say, during a recession, it should have more than enough financial strength to muddle through. And it might even be able to use the downturn to its advantage by acquiring financially weak competitors.
5. Fairly priced
As you can imagine, a dividend growth machine like Fastenal doesn't go on sale very often. And it isn't even on sale today, though the 2.6% dividend yield is above the five-year average yield of around 2.4%. But, using dividend yield as a rough gauge of valuation, it does look fairly valued.
FAST Dividend Yield data by YCharts.
This is backed up by the fact that the price-to-sales, price-to-earnings, and price-to-cash-flow ratios are all roughly in line with their five-year averages. The only common valuation tool that's a bit elevated is the price-to-book-value ratio. But, taken as a whole, it appears that investors are paying a fair price for this dividend growth stock.
For long-term dividend growth investors
Fastenal is not a screaming value opportunity, but given its impressive historical performance, that makes complete sense. If you prefer value investments, you might want to put this name on your wish list just in case there's a major market dislocation. However, if you are OK with paying a fair price for a great dividend stock, then you might want to consider this dividend growth machine right now.
