Recent Buy :: Snap-on Incorporated

You’re likely familiar with the following phrase:

Good things come to those that wait.

Well, I certainly hope that statement rings true as Snap-on Inc. has been on my dividend stock watch list for the last couple of months.

And as much as I wish that I could turn back time to when I first bought $SNA at $149/share, I had to acknowledge that it is perfectly okay to average up in cost-basis when a stock that has had a nice run presents a buying opportunity.

Background on Snap-on Inc.

Snap-on Incorporated may not be a household name unless you have a mechanic in the family, as they manufacture tools, diagnostic equipment, and additional service equipment to professionals worldwide.

While I’ve been familiar with the brand, it isn’t anything I ever bought as their tools aren’t sold in retail establishments. With both of my boys working in automotive repair shops, the Snap-on dealer truck makes routine stops and the employees can buy tools off of the truck or place orders for tools and equipment, and we now have an assortment of Snap-on tools.

Their tools are not cheap–but they do come with a lifetime warranty, which appeals to the mechanics that use these tools every day.

To give you an idea on their cost, it is not unusual for a rolling tool chest to run anywhere from $5,000 on the low-end to $15,000 or more on the high-end. Zoinks!

Snap-on operates through multiple internal groups, including: Commercial & Industrial Group, Snap-on Tools Group, Repair Systems & Information Group, and Financial Services segments.

The company was founded in 1920 and is headquartered in Kenosha, Wisconsin.

Snap-on By the Numbers

While Snap-on will not necessarily impress you with their dividend yield like Altria Group, they definitely will catch your eye with their outstanding track record of dividend growth.

The above snapshot highlights their dividend safety as well as key metrics such as the current dividend yield, market capitalization, beta, and dividend growth as calculated and reported by Simply Safe Dividends.

Note: Simply Safe Dividends is another tool that I’ve added to my dividend toolbox along with FAST Graphs.

As shown above, their most recent dividend growth has come in at 16% and this is remarkably consistent with their recent history over the last 5+ years.

Their yield of 1.82% might turn some people away, but it is important to have a mix of high-yield holdings along with high-growth holdings–and Snap-on definitely meets the mark for the latter.

Earlier I mentioned that I have been hesitant to add more to my Snap-on position because the price had run up ~25% since my initial purchase. However, lately I have been including analysis of a stock’s current dividend yield and P/E ratio in comparison to their 5-year averages in helping me determine potential buying opportunities.

In the snapshot above, you can see that their current yield of 1.82% is still a good margin above their 5-year average dividend yield while their current P/E ratio is below the 5-year average P/E ratio.

Both of these tell me that the stock may be undervalued right now.

Taking a look at Snap-on in FAST Graphs, we see that they are currently trading at about a 11.8% discount to their normal P/E ratio and again this signals that the stock may be undervalued right now.

While these indicators may demonstrate that a company’s stock is undervalued, they can also indicate that there are problems with the fundamentals of the company. Therefore, we will also take a look at a few additional metrics to see how the company is performing.

Here we see that Snap-on’s earnings per share have been on a steady climb since the Great Recession and they have been quite consistent in maintaining their payout ratio in the neighborhood of 27-29%. My guidelines call for a payout ratio below 60%, therefore Snap-on has plenty of coverage for their dividend including continued growth.

Taking a look at their Return on Invested Capital, which is a calculation that can give us insight into how well a company uses their money to generate positive returns, we see that Snap-on is yet again quite consistent. Even during 2008-2009, they continued to do well and have been north of 20% over the last 5 years.

Lastly, I took a look at their debt levels–which are quite low for Snap-on at about 18% debt/capital. The view above shows the earnings before interest, tax, depreciation, and amortization that would be required, in terms of years, to pay off all debt.

All of the above are indicating to me that Snap-on is a company that is still strong and producing solid results. This coupled with their dividend yield and P/E ratios both indicating a potential for being undervalued meant it was time for me to take a nibble.

Adding to Snap-on Position

With all of the signs above indicating that now may be a good time to buy Snap-on, I decided to enter a limit order a little below $180/share.

In addition, I am testing out a concept that I read about in Phil Town’s book called Rule #1 Investing where when you’re ready to make a buy of a particular stock, don’t buy it all at once but place your first order and then wait for the price to decline.

I’m sure that I am not alone in experiencing that.

You make a buy and the price continues to decline.

As a long-term investor, the small variance really won’t make too much of a difference however I can attest to it happening more often than not–and it happened here as my entry point was not the low of the day.

Here is a recap of my purchase:

The 10 shares purchased here will add an additional $32.80 in forward dividend income.

Overall, this increases my holding in Snap-on to a total of 15.023 shares.

While I have not followed up this purchase with a secondary purchase inline with the concept I am testing, I am continuing to watch to see if there will be an opportunity to add more in the $178/share range. If there is some continued downward movement in the price, I will be looking to add a few more shares.

As a note, if I were currently paying transaction fees, I might shy away from this approach. However, when I initiated this DGI portfolio with Fidelity I was fortunate to receive 300 free trades therefore I don’t mind smaller purchases.

Summary

Given that I have been watching Snap-on for a few months now, I am happy that I was able to add to my position at a price below $180/share and will continue to look for an opportunity to add a few more.

While their dividend yield is not the greatest, although looking back at the chart above that shows their yield in relation to the 5-year average you will see that my original purchase back in May was when the yield was north of 2.0%, they do provide very nice dividend growth and have done so consistently.

Snap-on typically announces their dividend increase in early November and is payable beginning in December.

I will be looking forward to that announcement to see if they maintain their 8-year history of increasing the dividend and recent trend of solid double-digit growth.

What do you think about this purchase?

Also, how do you like the combination of data from FAST Graphs and Simply Safe Dividends?

Photos courtesy of FAST Graphs and Simply Safe Dividends.