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Snap-on Is A Dividend Growth Investment At A Good Valuation

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About: Snap-on Incorporated (SNA)
by: Dividend Athlete
Dividend Athlete
Dividend investing, dividend growth investing, long only
Summary

Snap-On routinely achieves high returns on equity and invested capital.

The company pays a 2.7% dividend yield with a strong track record going back to 1939.

The balance sheet is strong and valuations have become favourable.

Franchisees have been angered by the lending practices Snap-On uses.

Investment Thesis

Snap-on Incorporated (SNA) is a profitable company with a strong balance sheet that has an excellent track record of rewarding its shareholders. The company has achieved an average ROE of 21% and ROIC of 16% over the last 5 years and is paying a safe, growing dividend. After a long period of the stock price trading sideways, it now offers compelling valuations for investors looking for growing income from their investments.

The Company

Snap-On Incorporated is an American manufacturer of professional automotive and industrial tools and equipment. The company was founded in 1920 and is headquartered in Kenosha, Wisconsin. Snap-On serves clients in more than 130 countries and has more than 12.600 associates worldwide.

The company makes a large percentage of revenues from 3 main business segments: Snap-on Tools Group, Repair Systems&Information Group and Commercial&Industrial Group.

Tools Group operates as a franchised mobile van network that mainly serves auto repair technicians.

Commercial & Industrial Group serves a broad range of customers through direct and distributor channels.

Repair Systems & Information Group segment serves independent and OEM (original equipment manufacturer) dealerships and repair shops.

Source: Snap-On Incorporated Investor Relations

Dividend

Snap-On boasts an impressive dividend history - the company has paid out dividends without interruptions or cuts since 1939. The current dividend yields 2.7% and is very comfortably covered by earnings and cashflows. Payout ratio from earnings is a very safe 30% and from free cash flow an equally solid 29%. The dividend has grown at an average of 12% over the last decade, with the latest increase coming in November and increasing the dividend by 13.7%. Shareholders have also benefited from share buybacks, with the last 5-yrs average buyback yield at 1.54% per year.

Balance Sheet

SNA has a strong balance sheet and the company's credit has been rated A-. Debt-to-Equity stands at just 0.3 and interest payments are covered almost 20x over. Debt-to-EBITDA is 1.14 indicating the company could pay off its debt obligations in a very short space of time if it chose to do so.

Valuation

Snap-On Incorporated shares have traded sideways since around 2015. As the company has continued to grow during that time, the valuations are now favourable. Shares are undervalued compared to the company's 5-yr average on both P/E and P/FCF basis as seen on the image below.

Source: Morningstar

Looking at the F.A.S.T Graphs valuation tool below, it also reinforces the undervaluation case.

Source: F.A.S.T Graphs

The cyclically adjusted P/E ratio stands at 20.

Risks

Looking at the price chart for SNA shares over the last 4-5 years, it is clear that whilst the share price from 2015 is close to the one today, it has been very volatile during that time, with many drawdowns of 10%-20%. It also Investors need to be comfortable with this type of volatility. Snap-On's business is also somewhat cyclical, and is connected to the strength of the automotive and industrial businesses. As the company does business in around 130 countries, it is also subject to currency risk.

There is also the risk of the company's relations with the franchisees deteriorating. The company has positioned itself as a bank of sorts, charging rates just under 20% from the franchisees and they are far from happy with it. This article dating back to 2017 delves further into the franchisee dispute the company finds itself in and it is something investors need to be aware of.

Summary

Snap-On is a good business trading at a good valuation and paying a healthy, growing dividend. I recommend income investors comfortable with the risks involved to do further research on it to see if it fits their portfolio. I have added SNA to my watchlist as the combination of current yield, dividend safety and its growth potential look interesting.

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