Wednesday, April 15, 2015

FAST Dividend Stock Analysis

Hello, this is Div4Son. 


Since I have additional funds for this month, I wanted to purchase another company to increase my number of stocks in my portfolio. Currently, I have shares in 18 companies, and my goal is to grow to 30-50. When looking for attractive companies, I try to follow my basic strategy - which is:Good quality + high yield + high growth (+ time & patience)

This strategy follows the same framework as the SBI book. 


This month, I used Mr. David Fish's CCC list and entered into my screener in  google sheets. One particular company was at the top of the screen list - Fastenal. 

Fastenal is probably not a brand people are familiar with, but it has raised its dividends for 16 years. 

About Fastenal

Fastenal sells industrial and construction supplies. It started business in 1967 selling threaded fasteners in small- to medium-size cities. Later, it changed its business plan to include some sites in large cities.

FAST has around 2,700 stores in the mostly in US with some international presence.  FAST distributes products to its store sites from 14 distribution centers, with 11 located throughout the U.S., two in Canada and one in Mexico.
Threaded fasteners accounted for more than 1/3 of its sales, and it has product lines in tools with industry equipment including cutting tool blades and abrasives, fluid transfer components and accessories for hydraulic and pneumatic power, plumbing, and heating, air-conditioning, storage materials, janitorial supplies, chemicals and paint, electrical supplies, welding supply items, safety supplies, metals, alloys and materials, office supply items. FAST sells mostly to customers in the industrial/manufacturing market for both OEMs and maintenance and repair operations, and to construction markets.


Summary of Criteria 


FAST Current price 40.1AreaCriteriaCheckListComment
Quality Company
Dividend Growth>5 yearsYes16 years
ROE/EPS/Op MarginStableYesSee Chart
Avg GrowthStableYesSee Chart
FCF over DividendsYesYesSee Chart
M* MoatWide MoatYesM* Wide
M* & S&P
Credit Rating
> BBB+---No Data
Cash to Debt & Interest Coverage, Debt to EquityCash Debt >1 or Interest Coverage > 5YesCash to Debt1.27
Debt to Equity 4.7%
M* & S&P Stars> 3 Stars for bothYesM* 4 Stars S&P CapIQ 3 Stars A quality rating
Payout Ratio<60%No60%
Dividend Growth
& Yield
Dividend Yield>3%No2.80%
Dividend Growth>5%Yes5Y CAGR 23%
Chowder>12%Yes 25.80%
Valuation
Yield/Avg Yield>1.1Yes1.65
Dividend Yield Theory Mid PointBelow Mid PointYesMid Point 69; Low Point 41.7
DRRM~10%YesAssuming 7% growth; projected return=9.98%
M* Estimate<M* estYesM* 45
S&P Estimate< S&P cap IQ estYesS&P Cap IQ 48

Data from M*, gurufocus, yahoo finance, S&P CapitalIQ, David Fish CCC list

Quality analysis

Years of Dividend raises

FAST has 16 years of dividend raises. This is a good indication of continued dividend raises. 

Stability of key metrics

These ratios provide an indication of how wide the moat is. I am looking for overall stability. If the ratios decline year over year, then this is an indication of moat reduction. 





FAST ratios are fairly steady - which means that it is quite stable. 

Average Growth 

Here, I look for the stability of growth indicators over ten years.  FAST has a slight decline - but the numbers are still healthy. This is something look at in the next couple of years if it continues the decline.




Free cash flow over dividends 

The EPS is healthily growing - which is a good thing. FCF, however mostly just covers the dividends. One thing to note is that FAST regularly gives special dividends.
Another thing to look out for is the payout ratio. At 60%, it is right at my threshold. But it has a rising trend which needs to be monitored in future years.


M* Moat

Based on Morningstar, FAST has a wide moat - which agrees with my assessment above.

Credit rating

Here, I look for companies with credit rating of BBB+. Just like banks wanting good credit from you when you apply for a loan, you want companies which are stable from a credit perspective. 

Neither morningstar nor S&P tracks the credit rating for FAST. 

Debt

I look at the debt to equity ratio (<50) and cash to debt and interest coverage.  

FAST Cash to Debt is 1.27 which means that it can pay off its debt with its cash. Also, the Debt to Equity is 4.7% which is much lower than the 50% threshold.

M* and S&P capital IQ rating

I am looking for 3 stars and above from either. A four star is a bonus.  M* gives 4 Stars and S&P CapIQ gives 3 Stars with as A quality rating. 

Dividend Yield and growth 

Ideally, a yield better than 3% is preferred, but depending on the chowder rule and dividend growth I am okay with lower yields. 

FAST yield is around 2.8%.

With the dividend growth in th 20% range, the combined yield and growth for FAST is greater than 12%. 

Value analysis

Average yield

The current yield per average yield for 5 years ratio is greater than 1.65 for FAST . I use this as a quick indicator for fair valuation (if greater than 1.1). 

A 1.65 means FAST is valuation is very attractive.

Dividend yield theory mid point

Using the dividend yield theory spreadsheet (based on the Dividends Don't Lie book), I calculate the mid and high points for the yield, from which I derive the price. 

Note: You can get the spreadsheet at: http://div4son.blogspot.com/2015/03/dividend-yield-theory-spreadsheet.html







I had to make several adjustments to the yield due to the special dividends and stock splitting. However, the data is available from FAST's homepage.

FAST Mid Point price is 68; the  Low Point price is 41 - which yields of 1.20 (for the low) and 2.8 (for the high).

Therefore, FAST is one the line low price/high yield points. 

Dividend Drill Return Model

Also, using the dividend play book DDRM model per the Dividend Playbook, I try to estimate the total return. 


DDRM
Dividend Rate ($)1.16
Divided by: share price41.36
Current yield (%)2.80
Core Growth Estimate (%)7.00
Divided by: ROE (%)26.69
Multiplied by: EPS ($)1.66
Cost of Growth (%)0.44
Earnings per Share ($)1.66
Minus: Dividend1.16
Minus: Cost of Growth0.44
Funding Gap ($)0.07
Divided by: Share Price ($)41.36
Share Change (%)0.16
Core Growth (%)7.00
Plus: Share Change (%)0.16
Total Dividend Growth (%)7.16
Plus: Dividend Yield (%)2.80
Projected Total Return (%)9.96

Assuming a conservative 7%, I estimate the projected return to be just around 10%. I am happy with anything around 10%. 

Playing with the numbers:


Dividend Rate ($)1.16
Required Return (%)10.00
Growth (%)7.16
Price40.79


M* and S&P valuations 

Morningstar gives FAST a fair value of 45. S&P capIQ gives a fair value if 48. Therefore, with a current price around 41, FAST valuation is very good. 

Risks

AmazonSupply is a big threat which can eat into Fastenal's market share. 
Fastenal claimed that its North American market can support 3,500 stores. With 2,700 stores today, Fastenal is close to saturating its North American market opportunity. 
Non-Fastener products are not their specialty. This impacts their margin and their moat accordingly.


--


I bought 40 shares of FAST on April 13th. This gives me a forward dividend of $44.80. This was before the quarterly results (which improved the share price) but I wasn't too concerned with this since I am holding for the long term.

That's it for today.


Div4son





Disclosure - long FAST 

4 comments:

  1. Very nice analysis, D4S. While not a company i own, I like to keep an eye on great companies such as FAST.

    Just discovered your blog - will be adding to my reading list.

    cheers
    R2R

    ReplyDelete
    Replies
    1. R2R,
      Thanks. I am glad you enjoyed my analysis of FAST. I am also interested in great companies and I get a lot of information from bloggers of the DGI community.
      D4S

      Delete
  2. Thanks for sharing. I am not too familiar with FAST but will certainly take a closer look. Hope you didn't mind that I've added your stock analysis of FAST (and your analysis of TROW) to our Collection of Stock Analyses. Hope it helps drive some more traffic to your blog.

    BTW, I've also added you to our blogroll. Look forward to reading future posts and various stock analyses. AFFJ

    ReplyDelete
    Replies
    1. AFFJ, thanks for adding my analyses to your collection. I hope they are useful for fellow bloggers.

      Delete