The Dividend Kings are a group of 46 stocks that have each raised their dividends for at least 50 consecutive years, explains Bob Ciura, editor of Sure Dividend; in this special 5-part report he reviews his favorite investments among the Kings.
We recommend income investors consider high-quality dividend stocks that have a demonstrated ability to raise their dividends, even during recessions. Tennant Company (TNC) is a Dividend King with a solid yield, consistent dividend growth, and high expected returns in the coming years.
Business Overview & Recent Events
Tennant Company is a machinery company that produces cleaning products and that offers cleaning solutions to its customers. In the US, the company holds the market leadership position in its industry, but the company also sells its products in more than 100 additional countries around the globe. Tennant was founded in 1870.
The company continues to generate modest growth in 2022, even in a difficult environment. In the second quarter, revenues increased 0.4% to $280 million. Revenues also were up on a sequential basis during the period. Tennant Company generated adjusted earnings-per-share of $0.92 during the second quarter, up from the previous quarter and ahead of analyst estimates.
For the full year, management is currently forecasting adjusted earnings-per-share in a range of $4.15 to $4.75 in 2022. At the midpoint of $4.45, earnings-per-share are forecasted to increase slightly from 2021.
Going forward, we expect Tennant to grow its annual earnings-per-share by 6% per year. Between 2010 and 2021, Tennant Company recorded an average annual earnings-per-share growth rate of 7%. The company has plans to grow its sales internationally, especially in the Asia/Pacific region, where it benefits from above-average market growth rates.
The takeover of Chinese cleaning equipment company Gaomei improves Tennant’s sales outlook in the Chinese market, as well as in other Asian markets, in the years ahead.
Valuation & Expected Returns
Tennant Company has increased its dividend for 50 consecutive years. The dividend payout ratio is expected to be below 25% for 2022, which indicates a very sustainable level. It seems unlikely that Tennant Company could be forced to cut its dividend.
Tennant Company is the leader in the US cleaning machines market. This serves as a competitive advantage, as Tennant Company’s market leadership allows for better economics of scale and a superior sales network compared to its peers.
We view the stock as undervalued, with a high return potential. At the midpoint of full year EPS guidance, TNC stock trades for a forward P/E of 13.7, which is below our fair value P/E of 18. Therefore, expansion of the P/E multiple will generate significant positive returns for shareholders moving forward.
Plus, we expect 6% annual earnings-per-share growth for the company, while shares currently yield 1.7%. Overall, total returns are expected to reach 13.7% per year over the next five years.