Parker-Hannifin Corporation A Dividend King On Sale

Aug. 07, 2019 11:23 AM ETParker-Hannifin Corporation (PH)8 Comments5 Likes
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AllStarTrader
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Summary

  • One of the least talked about dividend kings is now on sale.
  • The company has a broad portfolio of industrial products that are necessary for a variety of industries.
  • The stock has pulled back after recent earnings and offers investors an opportunity for a long term holding to be added to their portfolio's.

Source: Aquavalens

Parker-Hannifin Corporation (NYSE:PH) is one of the least talked about dividend kings I know of. The company was founded in 19117 and has quietly raised its dividend for 62 years in a row. In an investment in this conglomerate 25 years ago would have led to a 1183% return, not too shabby. The company has continued to grow its presence in a variety of industries which has quietly made it a consortium of sorts. The company touches lives in a variety of ways and yet is not a familiar name to most consumers. With recent earnings showing the company is doing fairly well, I decided to add shares to my portfolio on the pullback. In the long term, the company has a strategy that should position it to continue being the dominant player in each of the industries it operates in. This should produce positive returns for investors, hopefully for the next 25 years as well.

Performance

Parker-Hannifin recently reported earnings that beat expectations but missed slightly on the top line.

Source: Seeking Alpha

The company saw a decline in revenue which was impacted by a decrease in orders and currency translations as well as a divestiture. The company highlighted the following decreased in each division.

  • Orders decreased 3% for total Parker
  • Orders decreased 4% in the Diversified Industrial North America businesses
  • Orders decreased 8% in the Diversified Industrial International businesses
  • Orders increased 10% in the Aerospace Systems Segment on a rolling 12-month average basis

While this normally would signal trouble in the business, much of this is due to a general weakening in the global macro-economic environment. However, the company is still integrating acquisitions as well as taking on new ones to help it continue the record performance it is recognizing in earnings. In fact for FY2019 the company saw records in revenue, earnings, and free cash flow which signals it is still operating fundamentally strong.

Now here comes the interesting part, the company issued guidance for Fiscal 2020 that looks like there will be little growth. Management expects -3% to 0% sales growth; not positive at all. Guidance for earnings per share in the range of $11.38 to $12.18, or $11.50 to $12.30 on an adjusted basis means little growth this year. However, an important note is that this does not include two large pending acquisitions and the positive effects it should have on earnings.

These acquisitions are part of management's 5 year plan for 10% EPS CAGR.

Source: Earnings Slides

The company is doing this through acquisition and synergies and not just doing it for the sake of growth.

Source: Earnings slides

As we can see the company has been steadily increasing its operating margins through these opportunistic acquisitions and plans to continue to do so by increasing this to 19% in 2023. This along-side with the growth in revenue could drive earnings meaningfully higher and the stock price along with it.

The details of the first acquisition announced in April of Lord Corporation is found below.

Source: Company Presentation

The deal may seem a bit expensive, but given the currently low interest rate environment deals are going for a premium. The important note is that after synergies, Parker-Hannifin is paying less than 10x 2019 EBITDA for the diversified operation. What I like further is that the company will help increase Parker-Hannifin total sales by about 10% in the first year. Furthermore, the company operates at a high margin, helping boost overall company margins.

The company also has been growing sales at a faster clip than Parker-Hannifin has been by itself.

Source: Company Presentation

This and the presumed synergies should be very beneficial to total company operating margins. It also should be easy to accelerate sales for the new division as it operates in many of the same industries Parker already does.

The company has products that are necessary across a variety of industries.

Source: Company Presentation

Without these products, many of the manufacturers would be lost as there is no replacement for Lord's highly specialized products.

The combined portfolio of products gives Parker-Hannifin a better offering of solutions to products and enhances customer relationships.

Source: Company Presentation

The combined company would have an estimated $15.5 billion in sales FY2019 and with an improved margin profile, even more earnings. With the synergies, the company would have an additional $369 million in EBITDA, this should add about $2 in earnings per share in year one which has not been accounted for in guidance.

More recently, the company announced the acquisition of Exotic Metals Forming Company which primarily manufacturers sheet metal and other products of the sort for the Aerospace industry. It seems that Parker-Hannifin is dedicated to growing its exposure to an industry with attractive long term prospects which I like.

This transaction also improves the overall margin profile for PH.

Source: Company Presentation

However, the lower net sales means this probably won't improve the overall profile of operating margins for Parker.

This plus side is, the company is growing sales at a rate almost 5x above Parker-Hannifin by itself.

Source: Company Presentation

Part of this of course is the law of large numbers, but it benefits from operating in an industry with record demand.

This company also provides products that are necessary for airplane operation and has most of its revenue under long term contracts.

Source: Company Presentation

This provides a stable source of revenue that should whether any downturn and provide a safe stream of earnings for Parker. It is important to note that the company manufacturers products for Boeing's (BA) 737max. This could impact sales as the company has grounded these planes for quite some time and may need to halt manufacturing due to a natural buildup of inventory.

The added EBITDA from this deal should further help add to earnings about another $1 per share. This too is unaccounted for in guidance. While these acquisitions come at a cost, it is important to note that Parker-Hannifin generates strong cash flows that help support these moves. It recently saw its credit rating downgraded due to the moves, but I believe it should quickly be able to de-lever and regain the status it once had. The recent move by S&P leaves Parker-Hannifin with an A- credit rating, still quite safe and attractive by any measure.

Valuation

Taking a look at historical valuations is one way in which I identify opportunity. If the company trades below its own historical valuation levels and fundamentals are stable or growing, than it usually signals opportunity.

Source: Morningstar

In this case we can see Parker-Hannifin shares currently trade below their average P/S, P/E, P/CF, P/B, and forward P/E. This means the shares probably offer an opportunity at this time. Furthermore, an opportunity to buy shares in a dividend king on sale is rarely present. Usually a company with strong free cash flow generation, a safe payout ratio, and a long history of raising its dividend sees a premium price for its stock.

Looking at the historical yield, we can see if we can get an above average dividend yield.

Source: YieldChart

In the last 24 years, shares have typically yielded 1.6%, anything above this is considered above average and typically presents an opportunity for investors. We would expect the dividend to revert to the mean and provide upside potential. With shares currently yielding 2.15%, investors can lock in a dividend that has only been present about 10% of the time in the last 24 years.

Taking a look at the dividend score card. We can see that Parker is a reliable dividend payer and picking up an above average dividend from the company would be an opportunity.

Source: Seeking Alpha

As we can see the company doesn't do token raises either. The 5 year average growth rate is 10.56%. This combined with the low payout ratio leaves plenty of room for continued raises as an attractive rate.

Conclusion

Parker-Hannifin has seen its shares come off highs by 15%. The company continues to perform well and has two pending acquisitions that could boost earning but 25% in the coming year. Once this starts to show in the earnings reports it should result in a higher stock price. In the meantime, the company offers an above average dividend yield versus its own history. While it is not the highest dividend yield, it is certainly attractive none the less. Investors with a long term time horizon should take into account the progress the company has made over the last two decades and recognize that the performance should continue. It is not without risk as a global economic would impact sales due to its exposure to equipment and industrial manufacturing, but it seems the company has recognized this and is taking risk off the table by diversification. I have recently added shares to my portfolio and any further pullback would result in me acquiring more shares.

This article was written by

AllStarTrader profile picture
3.79K Followers
Started investing at 11 years old. Self taught, taking an analytical all around thought process approach to investing. Look at everything from all angles and every view and you will never miss anything. I believe in collecting dividends from most of my investments, just as an investment in a private company would return profits, so should my stocks. I prefer to invest based on fundamental values, but will consider the story of the company itself when necessary.
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Disclosure: I am/we are long PH. 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.

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