This article originally appeared on The DIV-Net May 4, 2009.
Company Description: Brady Corp is an international manufacturer and marketer of solutions that identify and protect premises, products and people. Products include labels and signs, safety devices, printing systems and software, and precision die-cut materials.
Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:
- Avg. High Yield Price
- 20-Year DCF Price
- Avg. P/E Price
- Graham Number
BRC is trading at a discount to 1.), 2.) and 3.) above. If I exclude the high and low valuations and average the remaining two, BRC is trading at a 29.6% discount. BRC earned a Star in this section since it is trading at a fair value.
Dividend Analytical Data: In this section I consider five factors, see page 2 of the linked PDF for a detailed description:
- Rolling 4-yr Div. > 15%
- Dividend Growth Rate
- Years of Div. Growth
- 1-Yr. > 5-Yr Growth
- Payout 15% of avg.
BRC earned two Stars in this section for 3.) and 4.) above. BRC has paid a cash dividend to shareholders every year since 1984 and has increased its dividend payments for 24 consecutive years. Its one year dividend growth rate exceeded its 5-year growth rate. This could indicate the growth rate is accelerating.
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:
- NPV MMA Diff.
- Years to > MMA
BRC earned one Star in this section for 2.) above. The NPV MMA Diff. of the $4,388 is below the $7,500 minimum I look for in a stock that has increased dividends as long as BRC has. If BRC grows its dividend at 7.6% per year, it will take 4 years to equal the cumulative earnings from a MMA yielding an estimated 20-year average rate of 3.64%. BRC earned a Star since its Years to >MMA of 4 is less than 5 years.
Other: BRC is a member of the Broad Dividend Achievers™ Index. In response to the global recession, BRC announced in November 2008 several initiatives to right-size their business and manage costs. Planned actions include a 10% reduction in the a global workforce, a company-wide salary freeze, continued reduction of discretionary spending and contingency plans for additional reductions in the event of more severe business downturn. BRC estimates approximately $30 million pretax of restructuring charges in fiscal 2009.
Conclusion: BRC earned one Star in the Fair Value section, earned two Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a net total of four Stars. This quantitatively ranks BRC as a 4 Star-Buy.
Using my D4L-PreScreen.xls model, I determined the share price could increase to $23.07 before BRC’s NPV MMA Differential fell to the $3,280 that I like to see for a stock with 24 consecutive years of dividend increases. At that price the stock would yield 2.95%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the needed $3,280 NPV MMA Differential, the calculated rate is 6.6%. This dividend growth rate is below the 7.6% used in this analysis, thus providing a margin of safety. BRC has a risk rating of 1.50 which classifies it as a low risk stock.
BRC was a peasant surprise. With a 27% free cash flow payout ratio and a 36% debt to total capital, BRC’s dividend should be sustainable in the near-term. The company’s management has shown itself to be proactive in planning for the economic downturn. BRC is a company I would give serious consideration to below my $23.07 buy price. For additional information, including the stock’s dividend history, please refer to its data page.
Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.
What are your thoughts on BRC?
Full Disclosure: At the time of this writing, I held no position in BRC (0.0% of my Income Portfolio).