(THIS ARTICLE IS FOR EDUCATIONAL PURPOSES ONLY. NOTHING MANTIONED HERE SHOULD BE CONSIDERED TO BE A RECOMMENDATION TO BUY OR SELL THE STOCK)
This week I am going to focus on one of the undervalued stocks I found this month after I ran my screen for undervalued dividend growth stocks: Snap-On Incorporated (SNA).
Snap-On, Inc. engages in the manufacture and marketing of tools, equipment, diagnostics, repair information, and systems solutions for professional users performing critical tasks. Its Products and services include hand and power tools, tool storage, diagnostics software, handheld and PC-based diagnostic products, information and management systems, shop equipment and other solutions for vehicle dealerships and repair centers, as well as for customers in industries, such as aviation and aerospace, agriculture, construction, government and military, mining, natural resources, power generation and technical education. The company was founded by Joseph Johnson and William Seidemann in 1920 and is headquartered in Kenosha, WI. https://www.marketwatch.com/investing/stock/sna/profile
SNA has been growing its dividend at a good rate for the past 10 years, has a PE ratio significantly lower than where it has been in the past, has the financial strength I look for when searching for stocks, and has a price has dropped significantly during this market crash, even as its earnings and dividend have continued to increase. This has led Snap-On Inc. to become undervalued.
Here is my analysis:
SNA meets all my criteria from the Dividend Champions, Contenders and Challengers CCC list (CCC): https://www.dripinvesting.org/Tools/Tools.asp
- Increasing dividend streak of 9 years (at least 5 years or more)
- Dividend Yield of 3.71% (> 2.0%)
- Payout Ratio of 34.81% (< 60%)
- Chowder Number of 20.2 (>16)
After screening the CCC list I check the dividend safety score on SimplySafeDividends.com. SNA has a safety score of 99, the highest possible rating. Having passed all these criteria, I proceed to evaluate the price history and the FAST Graph.
As the graph below shows, in 2014-2016 SNA made a nice move from a price of about 100 up to a price of about 160. For a while then it has pretty much stalled. Over the next 4 years the stock hit 170, 177 and 183, but each time it fell back to the 140 range. Through last year it hovered around a price of 155, the same level it was at the end of 2015. But then the Corona-virus hit, the market crashed, and SNA dropped down under 100. It has now recovered to around 120.
Source: https://stockcharts.com/h-sc/ui
But while its price is down, its earnings and dividends have not. The FAST Graph for SNA is shown below. The orange line shows how the earnings have grown consistently since 2004, with just a one-year drop after the recession, which immediately reversed and started rising again. The earnings have increased from $1.30 per share in 2004 to $12.26 per share in 2019.
As the earnings have gone up, so have the dividends. SNA has raised its dividend ever year for the past 9 years and has done so at an average annual rate of 12.4% such that the $1.22 dividend it paid in 2010 has now more than tripled to $3.93 in 2019.
This is all demonstrated on the FAST Graph below. The Orange line show the steady uptrend in the earnings, while the white line towards the bottom of the graph shows the increasing dividends since 2010. Most importantly the black line, which shows the price movement, is now below the orange line, indicating that the stock is underpriced.
Source: https://www.fastgraphs.com/fast-graphs/
Finally, as mentioned above SNA’s dividend yield is 3.71%. This gives SNA a PAAY (Percentage Above Average Yield) of 71% above the 5-yr average yield of 2.31%, another indication that the stock is undervalued. The higher the PAAY the more undervalued the stock is. We also see in the data in the lower right-hand corner of the FAST Graph that SNA has a credit rating of A-, which satisfies my requirement that the stock have an investment grade rating.
So, once we’ve decided that SNA is undervalued and is an appropriate stock for purchase, what kind of return can we hope to get? Again, we look to FAST Graphs. Fast Graphs shows that SNA’s average PE ratio over the years has been about 17. FAST Graph calls this the “normalized multiple”. At the present time the PE ratio is only about 9.9 (again confirming that stock is undervalued). If SNA simply moves back to its normalize multiple over the next few years, back to where it usually trades, you can expect a return of about 17.4% over the next few years, as shown on the graph below.
Source : https://www.fastgraphs.com/fast-graphs/
Snap-On Incorporated meets all my criteria for purchase. It has a strong history of dividend growth, a steady uptrend in earnings, good financial strength to support continued dividend growth, and by many indications is presently undervalued. Based on this information I believe SNA is worthy of consideration for dividend growth investing portfolios.
Snap-On Incorporated (SNA) – Summary:
- Yield 3.71%
- Payout Ratio of 34.81% so the stock has plenty of reserve to continue to raise its dividend
- Chowder Number of 20.2%, indicating a good combination of yield and growth
- Dividend Safety Score of 99 and credit rating of A-, showing excellent financial strength for continued dividend growth
- FAST Graph showing a strong history of steady earnings growth, and a price which is undervalued.
- A PAAY of 71.86%, confirming the stock is undervalued based on its dividend history.
- A potential annual return of greater than 14% over a 3-5 year time period if it simply returns to its normalized PE ratio.
Full Disclosure, I bought 149 shares of SNA on 4/6/20 at a price of $100.77 per share.
