Industrial Sector: Finding Companies with Sustainable Dividends

RGA Investment Advisor 2Q20 Commentary: The Tale of Two Markets

RGA Investment AdvisorRGA Investment Advisor commentary for the second quarter ended July 2020, titled, "The Tale of Two Markets." Q2 2020 hedge fund letters, conferences and more In our Q1 2019 commentary we expressed how “COVID-19 will kick off one of the most profound reshaping of our world any of us will see in our lifetime,” accompanied Read More


US Ecology Inc. (NASDAQ:ECOL)

My first featured aggressive selection is US ecology Inc., a small cap with a high earnings growth rate and only a modest amount of cyclicality.  I was also intrigued by the company’s high payout ratio perhaps indicating a very shareholder-friendly management team and Board.  The company has a niche operation that I also felt might be interesting to the aggressive dividend growth investor.  The following brief description is taken directly from their website:

“US Ecology is the nation’s most comprehensive supplier of cost-effective treatment and disposal services for low-level radioactive wastes, hazardous and PCB wastes and naturally occurring, accelerator produced and exempt radioactive materials. US Ecology takes pride in its excellent regulatory compliance record and long history of industry leadership.”

The following earnings and price correlated F.A.S.T. Graphs™ and the accompanying performance table clearly illustrates the incredible dividend record of the company since they initiated one in 2004.  Add in a very high capital appreciation component, and total shareholder returns are quite attractive.

As far as the future is concerned, the consensus of three analysts reporting to Standard & Poor’s Capital IQ expect the company to continue to grow at 18% per annum going forward.  Consequently, in spite of the small universe of analysts following the company, I felt this kind of potential was worthy of being singled out.

Balance Sheet

The following FUN (fundamentals underlying numbers) graphic looks at US Ecology Inc’s balance sheet on a per share basis.  The following table lists the metrics and the acronym for each item.  Therefore, at a glance we see that the company’s balance sheet has generally been strengthening in recent history.

Per Share Graph/Balance Sheet

  • assets per share (atps)
  • cash and equivalents per share (cashps)
  • common equity or book value per share (ceqps)
  • debt long-term per share (dltps)
  • debt per share (dtps)
  • invested capital per share (icaptps)

US Ecology Dividend Policy

Since this series of articles is focused on dividend growth stocks, the following excerpts from a recent press release sheds light on the company’s Board of Directors’ attitudes toward shareholders:

“US Ecology Affirms Dividend Policy
BOISE, ID — (Marketwired) — 05/30/13 — US Ecology, Inc. (NASDAQ: ECOL) (“the Company”) today announced that its Board of Directors has reaffirmed the Company’s dividend policy and intends to continue to pay an $0.18 per share quarterly dividend over the next year. The Board of Directors conducted its annual dividend policy review following the Company’s annual meeting of stockholders in Denver, Colorado on May 30, 2013.“Management and the Board of Directors believe the current dividend level achieves a balanced use of our free cash flow, rewarding our stockholders while expanding our state-of-the art waste treatment and disposal capacity, supporting organic growth investments and allowing us to pursue complementary acquisitions in the coming years,” commented Jeff Feeler, President and Chief Executive Officer. “With our industry leading return on invested capital of over 15%, we are committed to reinvesting in the business to generate attractive returns for our shareholders.”

The following fundamentals in millions, FUN Graph, plots cash and equivalents (cash), and common shares outstanding (csho), providing further evidence of the shareholder-friendly nature of the company’s management and Board as further reflected in this excerpt from their most recent quarter’s earnings report:

“The Company reported 18.4 million common shares outstanding and $4.5 million in cash on hand at March 31, 2013. Management estimates that approximately $3.3 million in cash will be paid out for each declared quarterly dividend. The next quarterly dividend is scheduled to be declared on July 1, 2013 and paid on July 25, 2013 to stockholders of record on July 17, 2013. Dividend declarations and payments will continue to be subject to quarterly financial review and compliance with applicable bank covenants.”

Finning International Inc. (TSE:FTT)

My second featured selection under my aggressive Industrial sector list is Finning International Inc., a Toronto Stock Exchange listed Canadian selection that appears to be currently very undervalued.  The company has an excellent long-term record of earnings growth, and in spite of its recent low valuation, this has translated into solid long-term shareholder returns.  The following earnings and price correlated F.A.S.T. Graphs™ and associated performance report illustrates my point.

Balance Sheet

The following FUN (fundamentals underlying numbers) graphic looks at Finning International Inc’s balance sheet on a per share basis.  The following table lists the metrics and the acronym for each item.  Therefore, at a glance we see that the company’s balance sheet has generally been very solid and even strengthening in recent history.

Per Share Graph/Balance Sheet

  • assets per share (atps)
  • cash and equivalents per share (cashps)
  • common equity or book value per share (ceqps)
  • debt long-term per share (dltps)
  • debt per share (dtps)
  • invested capital per share (icaptps)

Statement of Cash Flows

On the other hand, a graphical look at the company’s record of cash flows raises some red flags. The following table lists the metrics and the acronym for each item, and the following FUN graphic plots several key items from the company’s statement of cash flows as follows:

Cash Flow Statement

  • capital expenditures per share (capxps)
  • cash flow per share (cflps)
  • dividends per share (dvpsp)
  • free cash flow per share (fcflps)
  • operating cash flow per share (ocflps)

The company’s erratic and inconsistent record of operating cash flow per share and free cash flow per share raise questions that should be answered before an investment is considered.  However, consider that the free cash flow calculation is after dividends have been paid.

Conservative

I believe there are some very attractive conservative selections available in the Industrial sector.  Although many of the names do have histories of moderate cyclicality, I would stop short of labeling any of them as purely cyclical.  Instead, I like to think of them as quasi-cyclical.  Most importantly, even though they display the occasional temporary periods of earnings drops, most of the names on the list have steady and consistent records of dividends and even dividend increases.

Lockheed Martin Corporation (NYSE:LMT)

I chose Lockheed Martin Corp. as my first