Is Sturm, Ruger A Good Dividend Pick?

| About: Sturm, Ruger (RGR)


Strong growth in the dividends over the last five years.

Healthy cushion in free cash flows should allow the company to grow dividends in the future.

Increased production capacity and the ability to innovate should allow the company to compete well.

The firearm industry has come under a lot of pressure due to some sad incidents recently, and the government also planned to impose new gun control measures that could threaten the sales for these companies. Despite these threats, Sturm, Ruger (NYSE:RGR) posted strong gains in sales volume over the last year as fears about strict gun restrictions boosted the demand. Sturm, Ruger is an American firearm company engaged in designing, manufacturing and selling its products through licensed independent wholesale distributors located in the United States and Canada. In this article, we will discuss the dividend performance of the company along with support of strong future growth prospects.

Dividends Growth

Sturm, Ruger has not been a consistent dividend payer. The company skipped the dividend payments for three years from 2005 to 2008; instead, the company diverted the funds to the growth projects. However, Sturm, Ruger again started to pay dividends by the second quarter of 2009, as a result of stabilizing earnings from increased production capacity. Sturm, Ruger currently pays an annual dividend of $2.16 per share, yielding 3.6%. The company also has a substantial average dividend growth rate of about 105% over the last five years, with a special dividend distribution of $4.50 per share in 2012. Over the last year, the company distributed cash dividends of $41 million. Over the last two years, Sturm, Ruger did not purchase any shares of its common stock. However, for the current year, the company will buy back shares worth around $25 million.

The payout ratio is quite decent for Sturm, Ruger. The total dividends paid over the last year were $41 million, and free cash flows for the same period stood at $65 million - the payout ratio based on free cash flows for Sturm, Ruger stands at around 63%. The company also increased its operating cash flows by 38%, mainly due to the increased production capacity over the last year. However, the capital spending also rose by 104% over the same period. However, the company has reduced the 2014 capital spending guidance by 37%, which will leave enough free cash flows to increase the dividend distribution in the coming quarters.

Future Prospects

As mentioned earlier, the strict gun restrictions posted a serious threat of reduced turnover for firearm companies. However, shares of firearm manufacturers Sturm, Ruger and Smith & Wessson Holding (NASDAQ:SWHC) have both showed strong gains over the last twelve months, due to the increased demand. Sturm, Ruger was able to foresee the future increased demand of firearms and increased its production capacity by 33% in the last year. This increase in production resulted from investment in incremental capacity for new product introductions and from the utilization of lean methodologies for continuous improvement in operations.

Moreover, the company spent $55 million on its production facility in North Carolina during 2013, mainly to purchase tooling and fixtures in order to increase, upgrade and modernize manufacturing equipment. Furthermore, the company completed its first major expansion in 25 years by adding 220,000 square feet of manufacturing workspace.

Competition in the firearms industry is intense and comes from both foreign and domestic manufacturers. However, the principal methods of competing in this industry are product innovation, quality, availability and price. The company has spent approximately $6.2 million over the last year, on research and development. The demand for company's products grew and new products represented 29% of total firearm sales in the last year.

The firms in the firearms industry are also planning to diversify their product portfolio. Reliance on a single product is generally riskier in the industry where socio-political restrictions are actively decreasing the companies' margins. Therefore, Cabela's Incorporated (NYSE:CAB) diversified its product line ranging from hunting gear, apparel, fishing gear and ammunition, which provides the company a hedge against revenue shortfall risk in the firearm industry.


Sturm, Ruger has shown a strong trend of improving sales and bringing new innovative products to the market. The dividend growth is also strong with an uptrend in operating and free cash flows growth. Overall, the company is getting itself in a strong position in order to compete and fulfill the increasing demand with innovation and efficient production. We do not expect the dividend growth to remain at the five year average annual growth as the company started from a very small quarterly dividend. However, as the cash flows and earnings are strong for the company; the growth in dividends should continue

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. IAEResearch is not a registered investment advisor or broker/dealer. This article was written by an analyst at IAEResearch and represents his/her personal opinion about the companies mentioned in the article. The article is for informational purposes only and it should not be taken as an investment advice. Investors are encouraged to conduct their own due diligence before making an investment decision. I am not receiving any compensation (other than from Seeking Alpha) for this article, and have no relationship with the companies mentioned in the article.