This is the fifth in a series of articles that will take a look at the dividend Kings, companies that have paid an increasing dividend for 50 or more years. So far this series of articles has produced companies that range from small cap to large cap with varying dividend growth rates from 1% to 7%. I was surprised to find all kinds of companies in the list Johnson and Johnson (NYSE:JNJ) a large cap company with dividend growth of 7% and some other companies with dividend growth of less than 1%. This article is about Parker-Hannifin Corp. (NYSE:PH) and why it's a dividend growth income investment that has increased its dividend for 59 years making it a dividend King. Parker-Hannifin Corporation is a manufacturer of motion and control technologies and systems, providing precision engineered solutions for a wide variety of mobile, industrial and aerospace markets. Parker-Hannifin Corp. is being reviewed using The Good Business Portfolio guidelines. Fundamentals of Parker-Hannifin Corp. will be looked at in the following topics, The Good Business Portfolio Guidelines, Total Return and Yearly Dividend, Last Quarter's Earnings, Company Business Overview, and Takeaways and Recent Portfolio Changes.
Good Business Portfolio Guidelines
Parker-Hannifin Corp. passes 10 of 10 Good Business Portfolio Guidelines. These guidelines are only used to filter companies to be considered in the portfolio. For a complete set of the guidelines, please see my article "The Good Business Portfolio: All 24 Positions." These guidelines provide me with a balanced portfolio of income, defensive, momentum, total return, and growing companies that keeps me ahead of the Dow average.
Parker-Hannifin Corp. is a large-cap company with a capitalization of $15.8 billion. The size of Parker-Hannifin Corp. steady cash flow of $1.3 Billion from its business allows it to have the staying power to pay its average dividend and have plenty of cash for stock buybacks and company expansion.
Parker-Hannifin Corp. has a dividend yield of 2.20% which is average for the market. The dividend has been increased for 59 years and its dividend is very safe. The payout ratio average over the last 5 years is 26% which is very low and leaves plenty of cash to grow the business and for stock buybacks. Parker-Hannifin Corp. is therefore a good choice for the dividend growth income investor. After paying the above average dividend there is still cash remaining for business expansion.
Parker-Hannifin Corp. yearly cash flow is good at $1.3 Billion which leaves enough cash after paying its dividend for business expansion and stock buy backs. For 2016 Parker-Hannifin Corp. has bought back $450 Million in its shares.
I also require my growth rate going forward to be able to cover my yearly expenses. My dividends provide 3.1% of the portfolio as income and I need 1.9% capital gain in addition for a yearly distribution of 5%. Parker-Hannifin Corp. has a CAGR of 9% (from S&P Capital IQ). Looking back five years $10,000 invested five years ago would now be worth $14,100 today (from S&P Capital IQ). This makes Parker-Hannifin Corp. a good investment for the dividend growth income investor.
For Parker-Hannifin Corp. S&P Capital IQ has a sell rating with a one year price target of $104.00. This makes Parker-Hannifin Corp. moderately over priced at present but with projected business growth of 9% over the next year. In the long term Parker-Hannifin Corp. average dividend and its slow growing business in the industrial products sector is a good choice for the dividend growth income investor that's willing to wait for a better entry point.
Total Return and Yearly Dividend
The Good Business Portfolio Guidelines are just a screen to start with and not absolute rules. When I look at a company, the total return is a key parameter to see if it fits the objective of The Good Business Portfolio. Parker-Hannifin Corp. had better total return than the Dow baseline in my 41.0 month test period. I chose the 41.0 month test period (starting January 1, 2013) because it includes the great year of 2013, the moderate year of 2014, the small loss year of 2015 and the slightly positive year of 2016 YTD to see how the company does in good and bad markets. This above total return of 46.10% for Parker-Hannifin Corp. compared to the DOW baseline of 35.9% makes it appropriate for the total return and dividend income investor. Parker-Hannifin Corp. pretty much followers the DOW market over the test period and has a growing dividend. Year to date total return is 20.2% well ahead of the DOW small gain so far this year. The dividend is average at 2.20% and has been increased for 59 years making the company a dividend King.
DOW's 41.0 month total return baseline is 35.90%
41.0 Month total return
Difference from DOW baseline
Yearly Dividend percentage
Last Quarter's Earnings
For the last quarter Parker-Hannifin Corp. reported earnings on April 26, 2016 that beat expected earnings at $1.51 compared to last year at $2.06 and expected at $1.44 without special items. Expected revenue was inline and total revenue decreased by 6.0% year over year to $2.83 Billion. This was a fair report showing the decreased revenues while still making the earnings goal. This leaves enough cash remaining after paying the $0.63 dividend for expansion. Earnings for the next quarter will be released in late July and are expected to at $1.75/share compared to last year at $1.43/share. From the last earnings call management said that they had $623 Million of free cash flow and purchased $50 Million in share buybacks. Management also projected yearly earnings at $6.20 -$ 6.40. Product margin also increased 30 basis points to 13.80% a good sign for the future of the company.
Company Business Overview
Parker-Hannifin Corporation is a manufacturer of motion and control technologies and systems, providing precision engineered solutions for a wide variety of mobile, industrial and aerospace markets. The Company's manufacturing, service, sales, distribution and administrative facilities are located in the United States and in 49 other countries. Its products are supplied to approximately 450,000 customers in manufacturing, transportation and processing industry. The Company has two reporting segments: Diversified Industrial Segment products are made to original equipment manufacturers and their replacement markets in manufacturing, packaging, processing, transportation, mobile construction, refrigeration and air conditioning, agricultural and military machinery and equipment industries, and Aerospace Systems Segment products are made in the commercial and military aerospace markets to both original equipment manufacturers and to end users for spares, maintenance, repair and overhaul. The major problem with the business is the drag from the strong dollar and its correlation to the slowly increasing economy which in effect directly drives earnings. A last problem factor is that the company is dependent also on the defense budget which has been under pressure lately. Parker-Hannifin Corp. business is a steady growing company that should be considered for the dividend Growth income investor.
Takeaways and Recent Portfolio Changes
Parker-Hannifin Corp. is a good choice for the dividend growth income investor increasing its dividend for 59 years and growing the dividend in the future but is pricey right now and waiting for a better entry point is advised. Parker-Hannifin Corp. beats total return compared to the Dow average and is a good choice for the total return growth investor at the right entry point of $104/share. The business is growing at 9% CAGR and Parker-Hannifin Corp. is a industrial products company that does suffer the swings of most other companies with the economy. The Good Business Portfolio guidelines does not have an open slot right now but will certainly consider Parker-Hannifin Corp. when an open position occurs because of its income growth prospects. If you don't already have a position in the industrial products sector Parker-Hannifin Corp. may be worth a position for your dividend growth income segment of your portfolio at a lower price.
Trimmed Johnson & Johnson from 8.5% of the portfolio to 8.2% of the portfolio, must have good portfolio management and not let any one company get much above 8% of the portfolio. I love JNJ, it pays a 2.8% dividend grows at 8-10% a year and is defensive, JNJ should be in all portfolios.
Sold some covered calls on Harley Davidson (NYSE:HOG), sold May 50's June 52.5's and June 50.0's. If the premium gets to 20% of the sold premium price I will buy them back with the hope that HOG goes up so I can sell the calls again in the same month for a Double. On 5/10/2015 bought to cover the HOG May 50's since 80% of the premium has been achieved as an income gain. On 5/12/2016 bought to cover the HOG June 52.5's since 80% of the premium has been achieved as an income gain. On 6/1/2016 bought to cover the HOG June 50.0's since 80% of the premium has been achieved as an income gain. If HOG goes up in the next week the calls can again be sold for a double in the same month. All HOG covered calls have been bought to close. If the next quarter's earnings do not show some strength the portfolio will start to trim HOG.
The Good Business Portfolio generally trims a position when it gets above 8% of the portfolio. Below are the five top positions in The Good Business Portfolio. Johnson and Johnson is 8.2% of the portfolio, Home Depot (NYSE:HD) is 8.1% of portfolio, Boeing (NYSE:BA) is 7.9% of the Portfolio, Altria Group Inc. (NYSE:MO) is 7.1% of the portfolio, and Walt Disney (NYSE:DIS) is 7.0% of the portfolio, therefore HD and JNJ are now in trim position with Altria Group Inc. , Boeing, and Walt Disney getting close. Boeing is going to be pressed to 10% of the portfolio because of it being cash positive on individual 787 plane costs, announced in the fourth quarter earnings call. In the first quarter of 2016 deferred costs were $141 Million and deceasing as the year goes on. Deferred costs should start to decrease in the coming quarters and positive cash flow from the 787 program start to happen.
For the total Good Business Portfolio please see my recent article on Good Business Portfolio: 2016 first-quarter earnings and performance for the complete portfolio list and performance. Become a real time follower and you will get each quarters performance after the earnings season is over.
I have written individual articles on CAB, JNJ, EOS, GE, IR, MO, BA, Omega Health Investors (NYSE:OHI) and HD that are in The Good Business Portfolio and other companies being evaluated by the portfolio. If you have an interest please look for them in my list of previous articles.
Of course this is not a recommendation to buy or sell and you should always do your own research and talk to your financial advisor before any purchase or sale. This is how I manage my IRA retirement account and the opinions on the companies are my own.
Disclosure: I am/we are long BA, HD, JNJ, OHI, DIS, CAB, MO, EOS.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.