Polaris Industries: Blue-Chip Stock For Dividend Growth Investors

Many thanks to Sure Dividend for the following guest post!

The term “blue-chip” stock gets thrown around quite loosely in the financial media. Generally, it refers to quality, stable dividend payers that do not display high volatility. But at Sure Dividend, we have a more precise definition for what constitutes a blue-chip stock. 

In our view, a blue-chip stock qualifies for inclusion on one of the following lists: the Dividend Achievers (10+ consecutive years of dividend growth); the Dividend Aristocrats (25+ years); or the Dividend Kings (50+ years).

Polaris Industries (PII) has all the qualities of a blue-chip stock. It has a stable business model with consistent profits and steady growth. It has also increased its dividend for 25 consecutive years. Lastly, it has a solid dividend yield of 2.7%, which is well above the average yield in the S&P 500 Index. For all these reasons, we believe Polaris is a high-quality, blue-chip stock for dividend growth investors.

Business Overview and Growth Prospects

Polaris Industries designs, engineers, and manufactures snowmobiles, all-terrain vehicles (ATVs) and motorcycles. It also sells accessories and replacement parts through dealers. The company operates in over 100 countries around the world. Some of the company’s major brands include Polaris, Ranger, RZR, Sportsman, Indian Motorcycle, Slingshot and Transamerican Auto Parts. Polaris Industries has a market capitalization above $5 billion.

Polaris has benefited tremendously from the steady global economic recovery since the Great Recession of 2008-2009. The company posted strong results again in 2019. In the fourth quarter, sales increased 7% to $1.7 billion, thanks to 7% growth in its Off-Road Vehicles and Snowmobile segment. As this segment makes up approximately two-thirds of the company’s sales, it continues to lead to strong top-line growth.  which made up 66% of total sales, along with a 37% improvement in the motorcycle segment. Gross profit increased 8% to $423 million for the fourth quarter, while adjusted earnings-per-share of $1.83 increased slightly year-over-year.

For 2019, total sales came in at $6.78 billion, a 12% increase from 2018. Again, growth was led by 7% growth in Off-Road Vehicles and Snowmobile segment sales. Adjusted earnings-per-share declined 3.6% to $6.32 in 2019, due to elevated costs and growth investments. However, Polaris expects 2020 to be a snap-back year for earnings growth. The company expects sales to grow 2% to 4% for 2020, while adjusted earnings-per-share are expected in a range of $6.80 to $7.05. At the midpoint, Polaris expects 10% adjusted EPS growth for the upcoming year.

This level of growth will be more than sufficient for the company to continue raising its dividend in 2020 and beyond. Polaris’ share price has declined 10% over the past year, reflecting the earnings decline in 2019. However, the company is likely to return to growth in 2020, meaning long-term value and income investors could view the declining share price as a buying opportunity.

Valuation and Dividend Analysis

Based on expected adjusted EPS of $6.92 at the midpoint of 2020 guidance, Polaris stock trades for a forward price-to-earnings ratio of 13x. In our view, this is a fairly low valuation multiple for a highly-profitable and growing business. Shares of Polaris have had two distinct periods of valuation over the past 20 years. From 2002 through 2011, shares traded hands with an average earnings multiple of under 15 times earnings. Then, from 2012 through 2018, shares have traded hands with an average multiple of nearly 20 times earnings. We believe fair value for Polaris lies somewhere in between—our fair value estimate is a P/E of 16x. As such, today’s valuation implies the potential for a moderate valuation tailwind.

In addition, shareholder returns will be boosted by dividends and earnings growth. We believe 7% annual EPS growth is a reasonable expectation over the next five years. To be sure, there are many mitigating factors that could change the company’s growth trajectory, including a global economic slowdown and the lingering trade war. But we believe expected earnings growth in the high single-digit range is attainable for Polaris.

Lastly, the stock has a current dividend yield of 2.7%, and a long history of regular dividend increases. The company hiked its dividend by 2% in January 2020, the 25th consecutive year of dividend growth. Its new quarterly dividend rate of $0.62 per share, or $2.48 per share annualized, is highly secure. With expected 2020 adjusted EPS of $6.92 at the midpoint of guidance, Polaris has a dividend payout ratio of approximately 36% for 2020. This is a fairly low payout ratio, which leaves plenty of room for continued dividend hikes each year—particularly since future earnings-per-share are likely to keep growing.

Key Takeaways For Investors

Undervalued dividend growth stocks are hard to find in today’s market. Due to record high stock prices and low interest rates, valuations appear stretched, even among the highest-quality dividend payers. But investors can still find reasonably valued stocks with above-average yields, without having to take excessive risks in the stock market.

Polaris has a strong business model, with significant competitive advantages that should lead to many years of continued growth. In turn, it also increases its dividend each year, including the past 25 years which included multiple recessions. 

While no stock is completely without risks, Polaris is likely to continue increasing its profits and dividends for many years. With an above-average dividend yield of 2.7%, we view Polaris as a quality blue-chip stock for dividend growth investors.

Filed in: Dividend Growth Investing