Although every dividend growth investor's portfolio will be different, one thing will be similar, the decision to buy mostly large cap, so-called "blue chip" stocks. Some of the common ones for the dividend growth crowd include: Coca-Cola (KO), Procter & Gamble (PG), Johnson & Johnson (JNJ), AT&T (T), and General Electric (GE). These five stocks are some of the largest companies in the world and investors feel comfortable in investing in such large, well-known companies. There's nothing wrong with this strategy, a portfolio made up of these five stocks and others like them is bound to do very well over time with their records of dividend growth. However, with a lot of these common blue chip names currently overvalued, it may be time to take a look at some of the lesser known, smaller dividend growth stocks.
Although not a large cap by definition, with a market cap of only $4.97 billion it falls into the mid-cap category, Lincoln Electric (LECO) is a leader in its industry of small tools and accessories in the industrial goods sector. Compare the $4.86 billion market cap to that of the five blue chips mentioned earlier. Coca-Cola has a market cap of $180 billion, Procter ($215 billion), Johnson & Johnson ($243 billion), AT&T ($191 billion), and General Electric ($236 billion).
Lincoln Electric was founded in 1895 and is headquartered in Cleveland, Ohio. From the company's website, "Lincoln Electric is the world leader in the design, development, and manufacture of arc welding products, robotic arc welding systems, and plasma and oxy-fuel cutting equipment, and has a leading global position in the brazing and soldering alloys market." The company has forty-five manufacturing locations which includes operations and joint ventures in nineteen countries. Lincoln truly is a global business with a worldwide network of distributors and sales offices covering more than 160 countries.
Market Cap: $4.97 Billion
Current Market Price: $59.88
Trailing P/E: 19.32
Forward P/E: 15.47
PEG Ratio: 1.11
Looking at the key statistics for the stock, you can see that it is currently trading slightly above its long-term growth rate. It is also trading near its fifty-two week high of $60.58 achieved on May 31, 2013. I consider the stock to be fairly valued at the present and would consider initiating a position on a slight pullback although today's price would still be a good entry point for long-term investors.
Dividend Yield: 1.40%
Payout Ratio (Net Income): 25.81%
Payout Ratio (Free Cash Flow): 58.05%
Number of Years of Dividend Increases: 18 years
1 Year Growth Rate: 11.81%
3 Year Growth Rate: 9.22%
5 Year Growth Rate: 9.31%
Lincoln has been raising its dividend every year for the last eighteen years, making it a part of the Dividend Contenders on David Fish's CCC list. Although it does have a low yield based on today's price at only 1.40%, it does have a decent long-term dividend growth rate of 9.31% based on the five year rate. The stock is also trading just under its five year average dividend yield of 1.90%. The company is able to continue to pay these dividends using its growth in sales and earnings per share growth. Although the company's sales and earnings declined significantly in 2009 like most industrial goods companies, it has since rebounded.
Sales and Earnings Growth Rates
Earnings Per Share
*Due to large increase in 2010 from 2009 lows.
The company has been able to raise its dividend continually every year due to its sales and earnings growth. As an industrial goods company, its ability to grow is tied to the overall health of the economy, unlike a consumer staples company such as Procter & Gamble where consumers are going to buy products regardless of what the economy is doing. However, with Lincoln's history of paying and raising dividends aided by a strong management makes it one of the more conservative businesses in the industrial goods sector.
Management Effectiveness vs. Industry Averages
Return on Assets (TTM)
Return on Assets 5 yr. Average
Return on Investment
Return on Investment 5 yr. Average
Return on Equity
Return on Equity 5 yr. Average
In closing I believe Lincoln Electric deserves to be in the consideration of stocks for dividend growth portfolios. In today's low interest rate environment, many of the common, large cap dividend growth stocks have had their values artificially raised and it is time to consider other smaller, less known stocks. Although its starting yield is below what most dividend investors would consider, its dividend growth backed by solid sales and earnings growth make for a good combination for long-term investors. I hope you use this article as a starting point for your own research into this company to determine if this stock would make a good addition to your dividend growth portfolio.
All statistics taken from Lincoln Electric's website, Yahoo Finance, David Fish's CCC document, and Reuters. All stock prices current as of the market's close, July 5, 2013.