Parker-Hannifin: Dividend Growth Company With Stock Appreciation Potential

By Mark Bern, CPA CFA

Parker-Hannifin (NYSE:PH) has raised its dividend for 54 consecutive years. Yes, some years it has only been by a penny. But it hasn’t been cut, has it? The company has demonstrated to me that a rising dividend is important to its board and management. I like that because it’s also important to me. I don’t like dividend cuts!

Another important factor is the potential for future stock price appreciation. Where does that come from? Increasing earnings per share is the only way that I know of to consistently support a stock’s price appreciation potential. The record at PH is not perfect, but it is pretty close. Over the past 16 years I count only four years in which the earnings per share fell from the prior year. The worst drop came in 2002. The drop in 2009 was over 40 percent, but the company’s EPS in fiscal 2011 (ended June 30, 2011) have topped the 2008 peak by 15 percent. The company shows resilience. I like that also.

The payout ratio is only 19 percent so a cut is not likely. The company allows the payout ratio to rise during bad times while it lowers that rate during times of higher earnings growth. But when the payout ratio drops to 15 percent, management does not allow it to fall further and then the dividends can soar. I expect earnings per share to rise by an average of near 15 percent per year over the next five years unless the global economy falls back into recession. PH derives 41 percent of sales from outside the U.S. and is well positioned to take advantage of continued growth in developing countries.

The company pays a dividend of $1.48 per share. The recent price (as of the close on Friday, November 25, 2011) is $74.98, which is 25 percent below its 52-week high. I expect dividends to rise an average of at least seven percent a year over the next five years and for the price to reach as high as $145. That would represent a gain of 93 percent over five years combined with a seven percent average annual rise in the dividend for a total return of about 20 percent per year. The consensus 12-month target is $90.83 and the range of estimates is $80 to $105. If the street is even close, my five-year target looks very doable.

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