Three Consistent Dividend Payers; Garmin, Electro Rent and McGrath Rentcorp
Declan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In past articles I have touched briefly on some of the stocks which offered dividends in addition to good capital growth potential; for example, the current 6.6% of Atlas Pipeline Partners on paper seems generous, but when you consider the 5-year dividend growth rate of -10% and the 223% Trailing Twelve Months Payout ratio (effectively paying out over twice as much as it collects in earnings) the numbers don't appear so attractive.
However, what of an approach using Dividends as the primary ranking factor and growth potential as a secondary variable, what stocks come under consideration?
One of the first finds is Garmin (NASDAQ: GRMN). When people think Garmin they probably first think of iPhone and then a 'why bother?'. But the company reported in its most recent quarter a 20% jump in sales of its outdoor and fitness products at $148 million and generated 6% growth for its automotive and mobile units totalling $280 million; an area where the company was expecting a fall. The global positioning system manufacturer has a current dividend yield of 3.8%, but it's backed by a 26% 5-year Dividend Growth Rate and a Payout Ratio of 76%. The Payout Ratio is high and it isn't helped by Garmin's somewhat erratic quarterly earnings performance. Because of strong growth in its fitness and automotive segments it was able to come in ahead of consensus on its traditionally weak Q1, but comparable to the previous year's earnings ($0.45 to $0.43). The consensus for Q2 of $0.66 is similar to last year's $0.67; when the company went on to report $0.63 for the quarter.
Why is this important? In order for dividends to be sustainable (and grow), a company has to bring more in earnings than it pays it out in dividends. Luckily, the company has no long term debt, so it can service its dividend directly from its $1.4bn in cash and income and not have to borrow to generate cash to pay its dividend. Competition remains fierce in the Personal Navigation Device and is likely to continue losing ground to Apple and Android, but in more niche areas like golfing, cycling and running there is considerable growth potential; the company has already enjoyed success with its multipurpose Forerunner 910XT. The company reiterated 2012 guidance with anticipated strong growth in its Fitness segment, supported by increased share in its Marine and Aviation divisions, but a continual decline in Automotive and Mobile segments. The hit on Garmin's Mobile division has likely peaked given the smartphone penetration in the US is above 50%, so the net negative impact of earnings going forward should be offset by growth in its Fitness division.
Electro Rent (NASDAQ: ELRC) leases and sells new and used electronic test and measurement equipment. It's an interesting stock because from 1999 to 2011 it was knocking around between $8 and $14, but in a pique of buying at the start of last year it was able to break past $14 and advance near $20. Driving that gain was a series of stellar quarters which far outgunned then analyst estimates. But for 2012 the stock has drifted back to the $15s when estimates got ahead of reported earnings; it has taken until Q4 for 2012 for analysts to temper their earnings expectations after a Q3 report of 0.21 was well below the projected $0.27. Given the burst of action in 2011 it's surprising the stock has so few followers; only 40 CAPS members offer a rating (equally divided between outperform/underperform). What isn't there to like? Electro Rent sports an excellent 3-year dividend growth rate of 20% with a Payout Ratio of 70% and healthy 5.4% yield. Again, the Payout Ratio is high but annual revenues have risen from $146 million in 2010 to $246 million in 2012, with Net Income above pre-credit crunch levels at $26 million; the company generates $0.22 in cash flow for every $1 in value and has no debt.
The recent quarterly earnings miss only has relevance compared to the over inflated expectation of analysts; the company reported a flat year-on-year quarter EPS of $0.21 which is no great miss. Electro Rent's real issue may be its falling annual Gross Margins, which reflects a company losing out to the competition, although recent quarterlies do point to some stability. The company has admitted softness in its defense and aerospace sales based on budgetary concerns as US involvement overseas is reduced, but is more optimistic on its rental division which is likely to benefit on falling sales. This was reflected in a jump in rental revenue from $28.7 million to $31.7 million in Q3, surpassing its sales revenues of $28.4 million. Daniel Greenburg, the CEO concluded after its most recent quarterly results, "We remain cautiously optimistic as the defense and aerospace industries adapt to a new operating environment and a potential shift in their spending strategies... Fortunately, our March rentals looked encouraging and the initiatives we have undertaken over the last several years put us in good shape to become the partner of choice for providing the best test and measurement equipment acquisition alternatives.”
The third company to make the grade is McGrath Rentcorp (NASDAQ: MGRC). The company also engages in the leasing of electronic equipment, but also modular buildings and classrooms. Of the three stocks it has the most sustainable level of dividend growth; a healthy yield of 3.6% with a 7.5% 5-year growth rate and a Payout ratio of 45%. This is a company which isn't focusing on paying all of its profit in dividends. Although the Debt/Equity ratio of 85 is somewhat concerning; one doesn't want companies to borrow to pay out a dividend, but given the Payout ratio this is unlikely the case here. Like Electro Rent, it has seen a strong performance in its rental section with a 10% increase in revenues from the quarter one year ago. Up until Q1 2012 it had handily beat analyst estimates in the previous five quarters and beat by a penny in its latest quarter from last year. It also performs better than Electro Rent when Quarterly Margins are considered; these have steadily increased despite fluctuating revenues. Growing margins represent a company successfully competing in the marketplace. The area of exceptional growth was in its Tank Rentals division. This saw a 33% increase in revenue ($16.2 million for the quarter), but the company admitted it hasn't best optimized utilization of its idle equipment. In addition, with natural resource exploration likely to increase as areas previously uneconomical to explore are drilled, the potential for McGrath Rentcorp to benefit in this sector is high. Revenue from its electronic and modular business was relatively flat, so future revenue growth will likely depend on better use of its idle equipment. The company reaffirmed its expectations of $2.02-$2.12 per diluted share for the full-year 2012.
fallond owns a holding in Atlas Pipeline Partners. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.