Most income-oriented investors focus almost exclusively on the current dividend yield of stocks to decide whether to purchase them. However, the payout ratio and the growth prospects of the company are equally important, as they are the determinants of future dividend growth.
In this article, we will discuss the prospects of three stocks with solid dividend growth records, promising growth prospects and exceptionally low payout ratios. These dividend stocks have the potential to grow their dividends quickly for several years.
Parker-Hannifin (NYSE:PH) is a diversified industrial manufacturer that specializes in motion and control technologies. The company was founded in 1917 and has grown to a market capitalization of $37 billion.
Parker-Hannifin has a key difference from most industrial manufacturers. Its products are obscure but critical for the operations of its customers. As a result, the demand for these products remains robust even during adverse economic periods. Therefore, the company is more resilient to recessions than most industrial manufacturers.
The strength of the business model of Parker-Hannifin is clearly reflected in its exceptional performance record. During the last nine years, the company has essentially tripled its earnings per share, from $6.26 in 2013 to $18.72 in 2022. The company has grown its bottom line in eight of the last nine years. A consistent growth record is a testament to a wide business moat.
Parker-Hannifin has exhibited such a strong performance record primarily thanks to a series of acquisitions. It has acquired smaller competitors and has achieved great synergies. The latest acquisition was the one of Meggitt for $8.8 billion in cash four months ago. Meggitt, which generates annual sales of $2.3 billion, sells technology and products on every major aircraft platform. The takeover of Meggitt is likely to prove a major growth driver for Parker-Hannifin in the upcoming years.
Like all the global industrial manufacturers, Parker-Hannifin is currently facing some strong headwinds, namely high cost inflation and the rally of the dollar to a multi-year high. Nevertheless, the business momentum of the company is intact. In its fiscal first quarter, Parker-Hannifin grew revenues 12% over the prior year’s quarter and EPS 11%, from $4.26 to $4.74, thanks to robust demand in every region. Parker-Hannifin exceeded the analysts’ consensus by an impressive 57 cents and posted record sales and EPS for a first quarter. Notably, the industrial manufacturer has exceeded the analysts’ EPS estimates for 29 consecutive quarters.
Parker-Hannifin also has an outstanding dividend growth record. It is a Dividend King, with 72 consecutive years of dividend payments and 66 consecutive years of dividend growth.
The only caveat is the lackluster dividend yield of 1.8% of the stock. However, it is important to realize that the payout ratio of the stock is only 28%. In other words, the company could afford a much higher dividend, but it prefers to preserve cash to fund future acquisitions.
Parker-Hannifin has grown its dividend by 12% per year on average over the last decade and by 14% per year on average over the last five years. Given its low payout ratio and promising growth prospects, the company can easily continue raising its dividend at a double-digit rate for many more years.
Williams-Sonoma (NYSE:WSM) is a specialty retailer that operates home furnishing and houseware brands, such as Williams-Sonoma, Pottery Barn, West Elm, Rejuvenation, Mark and Graham, and others. The retailer operates traditional retail locations but also sells its products through e-commerce and direct-mail catalogs.
Williams-Sonoma has exhibited an exceptional growth record, as it has grown its EPS every single year over the last nine years at an impressive 21.7% average annual rate. The exceptional growth rate combined with the consistency are testaments to the strength of the business model of Williams-Sonoma and its perfect execution.
Williams-Sonoma is currently facing a strong headwind due to the surge of inflation to a 40-year high, which has led consumers to become more conservative in their spending habits. Excessive inflation has also increased the cost of raw materials, freight and labor.
In addition, due to the aggressive interest rate hikes implemented by the Fed, the housing market has slowed down sharply. This is certainly a negative development for Williams-Sonoma. Nevertheless, thanks to its strong business execution, Williams-Sonoma is poised to report just a 4% decrease in EPS for 2022. Notably, EPS in 2022 will still more than triple that of 2019.
Williams-Sonoma has grown its dividend for 16 consecutive years and is currently offering a 2.7% dividend yield. While the current yield is lackluster, the company has a payout ratio of only 22%. Moreover, the retailer has grown its dividend by 13% per year on average over the last decade and by 15% per year on average over the last five years. Given its rock-solid balance sheet, Williams-Sonoma can continue raising its dividend at a double-digit rate for many more years.
H.B. Fuller (FUL)
H.B. Fuller (NYSE:FUL) has a history of 135 years and is a leading global provider of adhesives, sealants and other specialty chemical products. Just like Parker-Hannifin, it operates in a highly profitable niche market thanks to the obscure but essential nature of its products.
The surge of inflation to a 40-year high exerts great pressure on most industrial manufacturers, as it has significantly increased the costs of raw materials, labor and freight. However, H.B. Fuller has proved markedly resilient to this headwind. Thanks to the critical nature of its products, the company has been able to implement material price hikes. Thus, it has passed its increased costs to its customers. As a result, H.B. Fuller is on track to report 21% EPS growth for 2022, a new all-time high.
H.B. Fuller has grown its EPS by 6.9% per year on average over the last decade and by 7.5% per year on average over the last five years. The company proved resilient to the pandemic, with just a 4% EPS decrease in 2020. Even better, it grew EPS by 22% in 2021 and by about 21% in 2022. The only caveat is the somewhat volatile performance record of H.B. Fuller.
On the other hand, H.B. Fuller has an exceptional dividend growth record. Indeed, the stock is a Dividend King, with 53 consecutive years of dividend growth. Despite this streak, the stock passes under the radar of most income-oriented investors due to its poor yield. It is currently offering a 1.1% dividend yield. It has offered a dividend yield of only 1%-1.5% throughout the last decade.
However, investors should realize that the low yield results from the exceptionally low payout ratio of the stock, which currently stands at 18%. In other words, the company prefers to invest its cash in acquisitions to grow its earnings instead of offering higher dividends. H.B. Fuller has grown its dividend by 8% per year on average over the last decade and by 4.5% per year on average over the last five years. Given its low payout ratio and its healthy balance sheet, H.B. Fuller can continue raising its dividend meaningfully for many years.
On the date of publication, Bob Ciura did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.