This article is a guest post written by Ben Reynolds of Sure Dividend. Sure Dividend focuses on high-quality dividend growth stocks suitable for long-term holding.
You may not have heard of Polaris Industries (PII) – it does not get as much recognition as other dividend growth stocks like McDonald’s (MCD) or Apple (AAPL). Still, Polaris Industries is the industry leader in off-road vehicles. Investing in the top company in an industry can produce phenomenal returns. Case-in-point: over the last 10 years, Polaris Industries has compounded its earnings-per-share at 16.8% a year. The company’s share price has increased nearly 400% in the same time period.
With rapid growth, one would expect Polaris Industries to be a relatively new company. It is not, however. Polaris Industries was founded in 1954. The company has paid steady or increasing dividends since 1989, making Polaris Industries a potential candidate to consider when building a dividend growth portfolio. Polaris Industries’ operations, growth prospects, and dividend are analyzed below.
Polaris Industries Operations are split into 5 segments. Each segment is shown below along with the percentage of total revenue generated by the segment for Polaris Industries in fiscal 2014:
- Off-Road Vehicles: 65% of revenue
- Parts/Garments/Accessories: 17% of revenue
- Motorcycles: 8% of revenue
- Snowmobiles: 7% of revenue
- Small Vehicles: 3% of revenue
The Off-Road Vehicles segment is by far the largest. The segments sells off road vehicles under the Ranger, RZR, Sportsman, and Ace brands. Polaris Industries surpassed its competitors to become the market share leader in off-road vehicles in 2010. Since that time, the company has increased its market share lead every year thanks to its strong brands.
The company’s second largest segment is the Parts/Garments/Accessories segment (hereafter referred to as PG&A). The PG&A segment generated 53% of revenue from accessories, 39% from parts, and 8% from apparel in fiscal 2014. 69% of total revenue came from off-road vehicle PG&A items.
The company’s other 3 segments accounted for 18% of total revenues in 2014, combined. The motorcycles segments sells under the Victory, Indian Motorcycles, and Slingshot brands. The Snowmobiles segment sells the following brands: RMK, Indy, Rush Pro Ride, and Switchback. The Small Vehicles segments sells under the GEM, Groupil Industries, Aixam, and Mega brands.
Polaris Industries has experienced phenomenal growth over the last 10 years. The company’s 10 year growth rates over a variety of metrics are shown below:
- Revenues-Per-Share Growth Rate: 1% per year
- Earnings-Per-Share Growth Rate: 8% per year
- Dividends-Per-Share Growth Rate: 7% per year
- Book-Value-Per-Share Growth Rate: 7% per year
As you can see, Polaris Industries has compounded shareholder wealth at between 12.7% and 16.8% a year over the last decade, depending on what measure you use. The company’s rapid growth has been driven by finding the ‘right people’, focusing on quality, and building its brands while increasing efficiency. Over the last decade, profit margins have increased from 7.7% to 10.1% – a significant boost in profitability.
Polaris’ management is expecting 12% sales growth per year and 13% earning-per-share growth per year up to the year 2020. If the management of most companies announced 13% earnings-per-share growth goals to 2020, investors would be wise to be skeptical. With Polaris Industries – the opposite is true. It is very likely the company hits its 13% earnings-per-share growth goals up to 2020. The company greatly exceeded this level of growth in earnings-per-share over the last decade. It would take a significant and protracted recession for the company to not grow earnings-per-share at a 13%+ a year going forward.
Polaris Industries will achieve its growth as it gains greater efficiencies through scale. The company is opening up a new manufacturing plant in the U.S. in the second quarter of 2016. Additionally, Polaris Industries is seeing strong demand for both in both its Motorcycles segment and its flagship Off-Road Vehicles segment.
Dividend Analysis & Valuation
Polaris Industries currently has a dividend yield of 1.5% and a payout ratio of just 28%. With a low payout ratio and a high expected growth rate, dividend investors in Polaris Industries should expect dividend growth of at least 13% a year over the next several years, and quite possibly higher. By 2020, current investors will have a yield on cost around 3% if the company grows its dividend payments at 13% a year. It is quite possible the company will grow its dividend payments significantly faster. If management decides to increase its payout ratio over the next several years, dividend investors will see even higher yields-on-cost.
Polaris Industries currently offers shareholders an expected total return of 14.5%. This return comes from dividends (1.5%) and expected earnings-per-share growth (13%). With a total return of 14.5%, Polaris industries investors can expect to double their initial investment in just over 5 years.
Somewhat surprisingly given its strong growth history, Polaris Industries does not trade at a nose-bleed price-to-earnings ratio. The company currently has a price-to-earnings ratio of 21.4 and a forward price-to-earnings ratio of 16.3. At current prices, Polaris Industries appears fairly valued – if not undervalued – considering the company’s excellent growth prospects.
Dividend Monk’s Note:
I decided to use the Dividend Discount Model to add more on valuation in this article.
Using the Dividend Discount Model with a dividend growth of 13% for the first 10 years and then a smaller dividend growth rate of 9% and a discount rate of 11% (since the company is not comparable to a giant dividend payer such as MCD), we get the following chart:
|Calculated Intrinsic Value OUTPUT 15-Cell Matrix|
|Discount Rate (Horizontal)|
|Margin of Safety||10.00%||11.00%||12.00%|
The Dividend Toolkit provides me with a two stage DDM calculation and clearly shows the stock trading at a 10% discount. I’ve doubled check my valuation with Morning Star and they value PII at $169. Therefore, my calculation are line with other analysts.
Polaris Industries has grown to become the leader in the North American off-road vehicle industry. The company has experienced somewhat of a renaissance over the last decade – and especially the last 5 years. Management has done a fantastic job of growing the business while simultaneously increasing margins and paying dividends.
In addition, Polaris Industries scores high marks for safety. The company is a member of the Dividend Achievers Index; it has increased its dividends each year since 1992 and has paid steady or increasing dividends since 1989. Polaris Industries has just under $230 million in debt on its books. The company made $455 million in profits in 2014; Polaris Industries is conservatively financed. In addition, the company has over $100 million in cash on hand.
Polaris Industries is a conservatively financed industry leader . The company offers investors solid dividend growth potential with a current yield about 0.3 percentage points below the S&P 500’s current dividend yield. Polaris Industries shares may be suitable for long-term dividend growth investors focused more on future income than current income.
Great stock at great price. I will keep my eyes on. Thanks for the solid analysis.
Strong stock and what is good and important with this equity is that the owners of the company’s stock have unity. They don’t know each other but they are loyal stock holders and as far as options go I wish that one statistic that was made known is the amount of covered calls or selling of puts in which generating cash while having a good chance to make a profit and or keep your stock or owning it at a discount. That would be something I would pay attention say having a service that gives that stat for the top 100 company’s that have the most of those options plays.