Final month, the automotive and industrial substitute elements inventory Real Elements ( GPC 0.35% ) introduced that it might be sending far more money to shareholders.
Real Elements raised its quarterly dividend per share by 9.8% to $0.895. This prolonged its dividend development streak to a tie for second place among the many Dividend Kings of 66 years straight.
Let’s dig into whether or not a dividend development investor can purchase Real Elements’ inventory by analyzing its fundamentals and valuation.
Picture supply: Getty Pictures.
Jaw-dropping earnings development for a near-century-old firm
Real Elements reported spectacular earnings outcomes for the 12 months ended Dec. 31 final month. The corporate delivered a strong rebound in its web gross sales over the pre-pandemic 12 months of 2019 and record-high non-GAAP (adjusted) diluted earnings per share (EPS).
Real Elements recorded $18.9 billion in web gross sales throughout 2021, which represents a 14.1% development price over the year-ago interval. Maybe extra appropriately, Real Elements’ web gross sales had been simply 2.7% under the $19.4 billion that was generated within the pre-pandemic 12 months of 2019.
However this does not give the complete image as a result of Real Elements accomplished the sale of its enterprise merchandise operation often known as S.P. Richards in June 2020. Factoring that income out of the outcomes for 2019, Real Elements’ present operations posted a 7.7% development price over 2019.
So what led the corporate’s web gross sales to bounce again in 2021?
Lagging semiconductor chip fabrication capability previous to the COVID-19 pandemic and a surge in demand for semiconductor chips resulted in a chip scarcity in 2021. For context, the common semiconductor chip stock was down from 40 days in 2019 to lower than 5 days at its worst level final 12 months. This compelled car producers to chop their manufacturing by as a lot as 7.7 million vehicles in 2021.
The drastically increased demand for used automobile substitute elements had been a lift to Real Elements’ NAPA and Alliance Automotive Group manufacturers. This allowed the corporate’s automotive phase income to surge to $12.5 billion in 2021, which was 15.5% increased in comparison with the year-ago interval. This was additionally 14.2% greater than the phase’s web gross sales in 2019.
And the restoration in demand for industrial substitute elements helped Real Elements’ Movement Industries model. This explains how the economic phase produced $6.3 billion in income in 2021, which was an 11.4% development price towards the prior 12 months. The phase’s gross sales had been nonetheless a bit under the $6.5 billion in income generated in 2019.
Real Elements’ adjusted diluted EPS surged 31.1% increased 12 months over 12 months to a file $6.91 in 2021. This was because of the upper web gross sales base and a 70-basis level year-over-year growth in its non-GAAP web margin to five.3%. The corporate’s adjusted EPS development price was nonetheless a decent 21.4% over 2019.
For an organization that was based in 1928, that is spectacular development. And analysts predict high-single-digit annual earnings development over the subsequent couple of years earlier than dropping to the mid-single-digits. This implies that Real Elements is a nice auto elements inventory that seems to have loads of development left in its future.
The dividend is well-covered, with vital development potential
Real Elements’ development forecast seems sturdy. Mixed with a modest dividend payout ratio, it is easy to grasp why the inventory introduced such a beneficiant payout elevate for its shareholders.
Real Elements’ dividend payout ratio was simply 46.8% in 2021. This permits the corporate to retain the capital essential to repay debt, repurchase shares, and execute bolt-on acquisitions to drive earnings increased.
That is why I would not be shocked to see Real Elements proceed handy out high-single-digit annual dividend will increase over the subsequent a number of years. When paired with its market-beating 2.8% dividend yield, Real Elements presents traders a pleasant mixture of speedy earnings and development prospects.
An exquisite inventory buying and selling at a good value
Real Elements’ fundamentals are sturdy. However does the valuation seal the deal to make the inventory a purchase?
Real Elements’ ahead price-to-earnings ratio of 15.7 is reasonably increased than the specialty retail business common of 13.8. However primarily based on the inventory’s high quality, I consider it is a affordable premium to its business. And Real Elements’ trailing-12-month dividend yield of two.6% is simply a tad under its 13-year median of two.8%. However that is considerably skewed, for the reason that inventory was conservative with its 3.2% dividend elevate in 2021. Real Elements’ fundamentals are additionally arguably the perfect they’ve ever been, so this once more looks like a good valuation to pay for dividend development traders.
This text represents the opinion of the author, who might disagree with the “official” suggestion place of a Motley Idiot premium advisory service. We’re motley! Questioning an investing thesis – even one in every of our personal – helps us all suppose critically about investing and make selections that assist us turn out to be smarter, happier, and richer.
