Fasten Fastenal to Your Portfolio
09/20/2017 2:56 am EST
Fastenal (FAST) started as a partnership among five friends in 1967 with the idea of pre-packaging automotive fasteners to be sold in vending machines, notes Ingrid Hendershot, money manager and editor of Hendershot Investments.
With a poor response to the vending concept, the company instead opened a store in Minnesota, to sell its fasteners. The company has since grown rapidly with more than 2,500 stores selling a broad range of industrial and construction supplies in all 50 states and more than 20 countries.
Celebrating its 50th anniversary, the company has now come full circle with its vending concept thanks to strong customer response for its FAST Solutions (industrial vending machines) today with an installed base of more than 66,000 vending devices.
Sales from industrial vending machines grew at double-digit rates in the second quarter with the goal of signing 22,000 vending devices in 2017.
Free cash flow increased 43% during the first half of the year to $236 million. For the full year, the outlook for capital expenditures was increased to $127 million from previous guidance of $119 million due to higher anticipated spending on supply chain and information technology.
During the first half, Fastenal paid $185 million in dividends and repurchased $57 million of its own shares, including 1.3 million shares purchased in the second quarter at an average price of $43.62 per share. The board of directors recently announced a new five million share repurchase program.
The firm’s conservative balance sheet provides management with the financial flexibility to invest in the business, increase the dividend and use excess cash to repurchase shares.
The dividend has grown at a 13% compound annual rate over the last four years, excluding a $.50 per share special dividend paid in 2012. Fastenal’s dividend currently yields a solid 3.1%.
Over the years, Fastenal has built a reputation as one of the most frugal companies in America. Bob Kierlin, one of the company’s original founders, instilled a no-frills sensibility into the company culture with the company’s ongoing mission to slash non-essential costs at every level of the company.
This has resulted in high profitability for Fastenal with return on shareholders’ equity averaging a superb 25% over the last decade.
With the marketplace in North America for industrial supplies estimated to be in excess of $140 billion, Fastenal is well positioned for future solid growth. As the manufacturing economy improves, the company’s end markets remain positive with sales accelerating throughout the second quarter.
Seeing success in all of their growth drivers, management appeared upbeat about prospects for the remainder of the year. Long-term investors should fasten Fastenal into their portfolio.
Fastenal is a high-quality firm with highly profitable operations and strong cash flows with a frugal management team expanding the share repurchase program and paying a 3% dividend. Buy.