Dividend growth investing – Snap-On is good for a dividend growth investor

When I look for long-term earnings-growing, compounding, companies to invest in, I still do not want to over-pay for my dividend growth stocks. As a result, I am looking for firms that are trading at a reasonable valuation and below some measure of intrinsic value. Ideally, they will pay me dividends so that I am ‘paid to wait’ for the stock prices to follow the growth in earnings. This is part of what I do as a dividend growth investor.

There are several firms that I am looking through and evaluating at the moment. One of the most important firms is Snap-On. This is a good selection from my list of dividend growth stocks. As you go through the content, it will give you an idea about some of the reasons I love dividend growth stocks and dividend growth investing …

Background on this pick for a dividend growth investor

This firm produces quality tools, sold through a franchise delivery model. This provides long-term relationships.

dividend growth investing

Reasons to like the firm if you like dividend growth stocks

There are quite a few reasons to invest in this firm. One of those not mentioned here will be the level of diversification required in your portfolio. Clearly, I cannot comment on this, but in my portfolio, it provides a good pivot from other sectors that are often represented in heavier weightings.

Compounding earnings growth

This is one of my key metrics – does the firm compound growth and value for me over time? In this case, the long-term chart of earnings growth shows steady growth. This is also expected to continue into the future, with analysts expecting just over 7% growth in earnings per year.

Dividends

A quick examination of share statistics shows a reasonable starting yield and a good long-term dividend growth rate. They are, in this respect, a strongly shareholder-friendly company that is ideal for dividend growth investing.

Share buy-backs

The firm has been putting through share buy-backs over time. These have been relatively slow-and-steady, and I note they occur during times of price weakness. This suggests that the decision to buy shares is also based on when it is a ‘good time’ so that the buy-backs create maximum value, rather than just indiscriminately buying back shares. In my opinion, the use of share buy-backs is an important point of distinction over a dividend growth ETF, where these types of individual stocks can out-perform through buy-backs.

Is it the right time to buy?

Is this a good time to make a purchase if you are a dividend growth investor? The chart continues up to the right, underpinned by healthy earnings growth and continued changes from the management team. At the moment, we can see from the chart that the price and PE have decreased to the ‘value territory’ for me, both with the PE lower than expected and lower than the PE=15x standard valuation, at about 14. So, this is in the ‘zone’ for me. I note that the recent price-action has shown a range-bound tendency. This appears to be compressing tightly, and I expect to see some explosive changes in the near-term future before the firm continues to grow.

Could the prices decline further? This is, through the recent 20-30 years, been a very shareholder-friendly firm and a very consistent grower and this has usually been rewarded with growth and only a few minor declines like we have seen at present. It could, feasibly, decline further if the market and economic conditions deteriorate, but beyond that wider risk, this looks like a sensible place to enter if you want to buy some good dividend growth stocks.

Can the stock prices fall further? Yes – it may not have the full range of the margin of safety I look for. Feasibly, the PE can fall into single digits (such as in the GFC or during the pandemic crash in 2020); or decline into low double digits. Waiting for a further decrease in price might be a viable approach or being happy with the potential for a larger draw-down.

Snap-on chart, showing high single-digit expected total returns over several years. This comprises good dividend growth, as well as an increase in prices driven by growth in earnings. Source: FASTGraphs

Risks

Like any firm, investing in SNA requires us to evaluate some risks.

Changing markets and technologies

One of the big issues is our societal shift from ICE to EV engines. This results in a shift in the type of tools and also the need for fewer physical tools, given that EVs have fewer components and may need less maintenance. In contrast, we see a greater need for computer-based diagnostic tools. While SNA has made moves in the past to address this issue, it requires a pivot in a new direction, and they will face a range of different competitors in, for example, computer diagnostics.

In contrast, though, the firm benefits from the strong relationships with customers and introducing tools and equipment to resolve customers’ issues. This keeps them at the forefront of the market and very much in-tune with customers, in a way that other firms will struggle to replicate. In my mind, this provides a foil against being disrupted by new entrants in the space and this should remain one of the top dividend growth stocks.

When I look for long-term earnings-growing, compounding, companies to invest in, I still do not want to over-pay for my dividend growth stocks. As a result, I am looking for firms that are trading at a reasonable valuation and below some measure of intrinsic value. Ideally, they will pay me dividends so that I am…

When I look for long-term earnings-growing, compounding, companies to invest in, I still do not want to over-pay for my dividend growth stocks. As a result, I am looking for firms that are trading at a reasonable valuation and below some measure of intrinsic value. Ideally, they will pay me dividends so that I am…

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