Bob Ciura, contributing editor to Sure Dividend, continues his countdown of favorite Dividend Kings — a highly select group of just 35 stocks that have raised dividend for at least 50 consecutive years.

Income investors looking for great stocks to own have many choices. One place we like to start is with the Dividend Kings. This group of companies has stood the test of time in terms of dividend excellence, but not all are created equal.

Read Part 1 of this special report here

Read Part 2 of this special report here

Read Part 3 of this special report here

Investors looking for strong dividend stocks have the luxury of looking in a variety of industries. While we tend to think of dividend stocks as being heavy in sectors like consumer staples or utilities, if one knows where to look, there are fantastic companies in what we might consider more cyclical areas of the economy.

One such example is Parker-Hannifin (PH), a company that manufactures and sells motion and control technology systems for a wide variety of industrial, mobile, and aerospace markets worldwide. Parker-Hannifin’s customer base is wide and deep given its vast array of products with various applications, and the company has managed to boost its dividend for 65 consecutive years.

That puts Parker-Hannifin in extremely exclusive company in terms of dividend longevity, even among the Dividend Kings.

In this article, we’ll take a look at why we believe the company has many more years of dividend increases in front of it, as well as why expected total returns look favorable.

Business Overview & Recent Events

Since fiscal 2012, Parker-Hannifin has done an outstanding job of growing earnings-per-share. Indeed, over that decade-long period, the company has averaged 9% annual earnings-per-share growth. Given the variety of economic conditions that have persisted during that time frame, that sort of growth is quite attractive. In addition, it has only seen two years in that period where earnings declined year-over-year, so its growth has been fairly consistent.

We see the bulk of growth accruing from revenue growth. Within the revenue growth outlook, part of it will be organic, and the balance we believe will come from the company’s acquisitions. Parker-Hannifin has a history of acquiring growth, with examples including LORD, CLARCOR, and Exotic Metals in recent years.

The company is currently in the process of acquiring Meggitt PLC, a UK-based aerospace and defense company that sells technology products for a variety of aircraft platforms. Meggitt produces about $2.3 billion in annual revenue, so the acquisition is sizable for Parker-Hannifin to say the least. The $8.8 billion cash transaction price is also nearly a quarter of Parker-Hannifin’s current market capitalization. Given these factors, the Meggitt acquisition has the chance to be transformational for Parker-Hannifin over time.

Not only does Parker-Hannifin stand to gain from a higher top line with its acquisitions, but these generally provide synergies as well. This is a proven growth method for companies in many industries, and Parker-Hannifin is no exception. Given the size of the Meggitt acquisition, we expect synergies of hundreds of millions of dollars over time, which will add to Parker-Hannifin’s operating margins as costs are leveraged lower.

Parker-Hannifin has, at times, repurchased its own stock in meaningful quantities. This drives earnings-per-share higher over time as earnings are allocated to fewer shares, increasing the relative value of those earnings for the shares that remain. We don’t expect a huge increase in growth from a declining share count, particularly given the cash expenditure on Meggitt, but it could add a low-single digit amount to average annual growth.

Growth may be a bit lumpy given the prospective acquisition of Meggitt, but over time, Parker-Hannifin has proven to be a strong, consistent growth company. With robust end markets in both civilian aerospace and defense, as well as an ever-expanding product catalog, Parker-Hannifin stands to do quite well in the years ahead.

Competitive Advantages & Growth Prospects

Given the company’s dividend increase streak of 65 years, Parker-Hannifin is obviously one of the best in the world on this measure. However, we’ve seen stocks with very long dividend increase streaks become forced to cut their payouts for one reason or another, so let’s examine the dividend safety and growth prospects for Parker-Hannifin.

The dividend has grown at an average rate of 10.3% over the past decade, which is outstanding for any stock, but in particular, one with a dividend streak as long as Parker-Hannifin. We see many times that the stocks with the longest streaks have maxed out their ability to raise the dividend, either because the payout ratio is very high, or earnings growth has faltered. In the case of Parker-Hannifin, neither of those things has occurred, and we therefore see the future as very bright for the dividend.

We expect to see 10% annual growth in the dividend for the foreseeable future, driving the payout from the current value of $4.12 per share annually to $6.64. Even with this outstanding dividend growth over time, the payout ratio is expected to be just 24% for this year, and the same five years from now.

That means that with Parker-Hannifin, investors get a stock with a 65-year dividend increase streak, strong growth prospects, and exemplary dividend safety. Even in a severe recession, we believe Parker-Hannifin could continue to raise its dividend. In fact, that’s exactly what happened during the Financial Crisis, and we believe the dividend is safe irrespective of economic conditions for that reason.

Valuation & Expected Returns

We see Parker-Hannifin as providing shareholders with very strong total returns for buyers of the stock today. We expect to see 10% annual earnings-per-share growth, and combined with the 1.4% dividend yield, as well as an offsetting 1% headwind from the valuation, see the stock producing total annual returns of 10.2% on average in the years to come.

In a market where many stocks are overvalued, and therefore have relatively poor total return outlooks, Parker-Hannifin bucks the trend and looks like a buy.

Final Thoughts

Parker-Hannifin is an example of a world-class dividend stock. The company has increased its dividend for more than six consecutive decades, putting in the most exclusive company around the world on this measure.

The current yield is just about even with that of the broader market, so its prospects as a pure income stock aren’t quite as bright as some other Dividend Kings. However, for consistent growth, a reasonable valuation, and strong dividend growth, we think investors would do well to consider Parker-Hannifin.

We expect total annual returns to exceed 10%, and given this, we rate Parker-Hannifin stock as a top Dividend King for 2022.

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