TipRanks Smart Dividend Newsletter – Edition #26
Hello and welcome to the 26th edition of TipRanks’ Smart Dividend – a weekly Newsletter providing you with investment ideas for safe-bet quality stocks that are outstanding dividend payers, compared to their peers.
Today’s dividend stock recommendation is an industrial toolmaker that has been uninterruptedly paying dividends for 84 years, and consistently increasing them in the past 14 years. But first, let us present a brief investment thesis, supporting our recommendation.
Investment Thesis: Tools for Resiliency
The industrial machinery and tool sector is a foundational element of the global economy, offering steady and reliable investment opportunities. Characterized by its vital role across various industries such as aviation, agriculture, and construction, this sector is essential for maintaining and advancing our modern infrastructure.
While every generation witnesses its own “gold rush,” be that actual gold, oil extraction, or new technology advancement, there is always a necessity for the suppliers of “picks and shovels.” These are the machine and tool makers, who provide all other industries with essential means of production and repair.
Embracing the adage “slow and steady wins the race,” companies in this field typically exhibit consistent growth and resilience. Their contributions are crucial, not just in providing equipment but also in enabling progress across multiple sectors.
Although the industry is mature, innovation remains a key driver, with ongoing developments in tools, diagnostics, and solutions. This innovation is critical in keeping pace with technological advancements, reflecting a commitment to continuous improvement and efficiency.
Investors looking at this sector can expect a balance of stability and potential for growth. The industry’s focus on quality, reliability, and brand reputation makes it a compelling choice for investors interested in steady income and long-term value.
Quality Dividend Stock: This Week’s Top Pick
Snap-On, Inc. (SNA) is an American industrial company that designs, manufactures, and markets tools, equipment, diagnostics, as well as repair information and systems solutions for professional users worldwide. The company serves the aviation and aerospace, agriculture, infrastructure construction, government and military, mining, natural resources, power generation, and technical education industries.
Snap-On provides a wide range of hand tools, power tools, and tool storage products, as well as handheld and computer-based diagnostic products, service and repair information products, diagnostic software solutions, electronic parts, business management systems and services, point-of-sale systems, integrated systems for vehicle service shops, original equipment manufacturer (OEM) facilitation services, warranty management systems and analytics, and engineered solutions. In addition, SNA offers solutions for the service of vehicles and industrial equipment, as well as after-sales support services and training programs. Further, it provides financing programs to facilitate the sales of its products and support its franchise business.
The company operates through four segments: Snap-on Tools Group, Repair Systems & Information Group (RS&I), Commercial & Industrial Group (C&I), and Financial Services. The segments are organized according to SNA’s primary customer segmentation.
The Tools Group, responsible for 38% of the annual revenues, includes business operations primarily serving vehicle service and repair technicians through worldwide mobile tool distribution channels. RS&I Group, which provides 30% of revenues, serves professional vehicle repair customers, primarily owners and managers of independent repair shops and original equipment manufacturer dealerships through direct and distributor channels. The C&I Group, responsible for 26% of revenues, consists of business operations that serve the aerospace, natural resources, government, power generation, transportation, and other critical industries, as well as the technical education markets. The Financial Services segment, which provides 6% of revenue, comprises of installment sales and lease contracts arising from franchisees’ customers, and business loans and vehicle leases to franchisees.
The company was founded in Wisconsin in 1920 as “Snap-on Wrench Company,” pioneering the idea of interchangeable sockets and wrench handles. Throughout the 1920s, the Snap-on product line expanded; In 1923, Snap-on filed for its first patent and published its first product catalog. The company’s initial fast success was supported by the shift to automobiles that was underway in the United States at the time. Later in the 1920s, Snap-On expanded beyond auto repair, adding a range of industrial tools, and also began its international expansion, filling international orders and opening a Canadian subsidiary. During WWII, SNA became one of the preferred suppliers to the U.S. government, producing tools that kept air and ground equipment operating. During the post-war era, Snap-On capitalized on the secular growth trend that created a surge in housing, road, and other construction, expanding its dealer network in auto repair and industrial segments. At the same time, the company added to its aviation and aerospace solution suite.
Snap-on’s common stock began trading on the New York Stock Exchange (NYSE) under the ticker symbol “SNA” in 1978. Previously, the stock was bought and sold over the counter.
Through the years, SNA continued expanding its international presence, as well as product and solution range, and sales network, growing organically as well as through acquisitions. Its latest acquisitions include the purchase of AutoCrib, Inc., a provider of tool and asset control solutions, for $36 million in cash in 2020; Dealer-FX Group, Inc., a provider of software solutions for automotive OEMs, $200 million in cash in 2021; and Mountz, Inc., a developer of high-precision torque tools, for $40 million in cash on November 1, 2023.
Today, Snap-On, Inc. commands a market capitalization of $14.7 billion and annual revenues of $4.5 billion, serving professionals in over 130 countries through its franchise network. The company has 12,900 employees and operates manufacturing, warehouse, distribution, research and development (R&D), and office facilities throughout the world, including 13 manufacturing facilities in the U.S. Despite the wide geographical diversification, the U.S. is responsible for about 70% of total annual revenues.
Snap-On is a leading innovator in its sphere, with 3,600+ active and pending U.S. and international patents. The company invests heavily in R&D and operates several R&D facilities, which help it maintain its innovative lead and industry-leading width of the product range.
Throughout its history, Snap-On has demonstrated steady growth, building on its core competencies and unwavering commitment to product quality, as well as its smart marketing strategies. The company has achieved a strong sustainable moat, becoming the go-to brand for top-quality tools and services for professionals, and ranking first among its competitors in product quality scores year after year. A long-standing brand name associated with quality and valued by customers is one of the main assets in this competitive industry, increasing the barriers to entry.
The company’s main competitors are well-established large companies like Stanly Black and Decker (SWK), Fortive Corporation (FTV), Bosch, Illinois Tool Works (ITW), and Dover (DOV). However, the fact that no single company presents overall competition, instead competing in specific narrow niches, supports SNA’s market share growth. Snap-On’s hand tools and power tools product lines dominate the relevant market niches, generating high profit margins. SNA’s hand tools line commands over 50% U.S. market share, and power tools line – over 25% market share.
Despite its cash acquisitions and heavy R&D investment, Snap-On showcases stellar financial health. SNA’s net debt-to-equity ratio is a very low 5%, with the debt well-covered by operating cash flow and the interest payments covered by EBIT many times over. The company’s short-term assets exceed both its short- and long-term liabilities. SNA’s debt is highly rated by the global credit rating agencies: “A-” at S&P Ratings, “A” at Fitch, and “A2” at Moody’s.
Particularly, Fitch mentioned that Snap-On’s ratings are “supported by its strong market position, high level of customer brand loyalty, conservative financial management, and consistent free cash flow generation.” The rating agency added that SNA’s “strong business profile is underpinned by its dominant market position in the automotive tools business,” where cyclicality is low, enabling revenue growth in all economic conditions, and “strong, though less dominant, position in its other segments.” Fitch also said it believes that SNA is well-positioned to adapt to the electrical vehicle (EV) transition thanks to its “strong market position, deep industry knowledge and history of innovation.”
SNA’s capital efficiency ratios are robust and compare favorably to the industry averages. Thus, its Return on Equity (ROE) of 21.8%, Return on Assets (ROA) of 13.8%, and Return on Invested Capital (ROIC) of 18.9% are much higher than the Machinery industry averages. The company’s healthy liquidity position is underscored by its current ratio of 3.7, quick ratio of 2.5, and cash ratio of 1.0. Snap-On’s profitability is also reflected in its margins, which are positioned in the top 10% of its industry: gross margin of 51.6%, operating margin of 21.2%, and net margin of 19.4%.
In the past three years, the company has been growing revenues at a CAGR of 10%, and earnings at a CAGR of 20%. In October, SNA reported its Q3 2023 results, delivering a strong beat on revenue and EPS. In fact, the company exceeded analysts’ EPS projections in all quarters for which these estimates were available, with the sole exception in Q1 2020, the onset of the pandemic-related restrictions.
In the last quarter, Snap-On’s sales rose 5.2% from Q3 2022, while EPS grew by 9% year-on-year; net profit margin expanded to 20%, driven by higher revenue. All business segments performed well, registering year-on-year growth in the quarter. The company finished the quarter with $960 million in cash and cash equivalents, an increase of over 25% year-over-year. For the full-year 2023, SNA is expected to post EPS growth of ~11% versus 2022’s bottom-line results.
The Industrial sector in general, and specifically the Machinery industry, is not characterized by high earnings growth, as it is a slow-growth mature industry. On this background, Snap-On’s ability to generate consistent and uninterrupted sales growth without taking on any debt is quite unique.
No wonder, then, that the company’s stock has behaved similarly to its finances, showing steady growth over the years, and easily outpacing the S&P 500 (SPX). In the past three years, SNA rose by 62%, while the index gained 26%. In the past 12 months, Snap-On’s shares gained 17.5%, versus SPX’s 14.5%.
Furthermore, TipRanks-scored top Wall Street analysts see an average upside of 19% for the stock in the next 12 months. SNA carries a TipRanks Smart Score rating of 9/10 (“Outperform”):
Despite the robust, years-long, stock increases, SNA is trading at modest valuations. Its TTM P/E of 15.1 and a Forward P/E of 14.9 represent ~27% discounts to the Industrial sector’s averages. When compared to its peers in the industry, Snap-On comes at the bottom of the price range; it is also currently trading below its fair value. Weighing the company’s financial metrics against its low valuations, we believe that its stock presents a value-investment opportunity.
Importantly, the company’s reliability doesn’t shine only through its sales and earnings numbers but finds its reflection in its dividend policies. Snap-On has been constantly paying dividends (without a single interruption or reduction) for 84 years (i.e., since 1939), consistently increasing them in the last 14 years. The latest dividend increase was announced on November 2, when the payout was raised by 14.8%. This long history of uninterrupted dividend payments through various economic conditions reflects the company’s resiliency and financial stability.
SNA’s current dividend yield stands at 2.4%, much higher than the Industrial sector’s average. Over the past decade, the company grew its dividend-per-share payouts by an annualized rate of 12.3%, with an acceleration to a 19.8% rate in the past three years. Meanwhile, its modest payout ratio of 35% reflects the fact that Snap-On retains more than sufficient capital for business growth and has a lot of room for further dividend increases. According to the company’s management, SNA’s strong financial position and robust cash generation enable it to reward its shareholders with a consistently increasing cash dividend and to support its ongoing strategic investments, organically and through acquisitions, along its defined runways for both growth and improvement.
In addition to dividends, Snap-On rewards its shareholders through buybacks on a discretionary basis. It currently has a share repurchase program in place since May 2022. In the first nine months of 2023, SNA has repurchased $234 million, leaving it with an additional $304.5 million capacity for further buybacks through the end of 2024.
To conclude, we believe that Snap-On, Inc.’s stellar strategy and strong delivery, reflected in its financial strength, industry-beating capital efficiency, and earnings growth metrics, supporting shareholder compensation increases in the years to come, is an exceptionally attractive choice for dividend investors.
Disclaimer
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