Is Parker-Hannifin Corporation a Dividend Beast, Backslider, or Bust?

Parker-Hannifin Corporation, the diversified manufacturer of engineered motion and control technologies, is known for a mean streak of dividend increases. Should you invest?

Mar 6, 2014 at 6:20PM

Parker-Hannifin Corporation (NYSE:PH), a $13 billion global manufacturer of motion and control technologies, is renowned among dividend investors for its 57 years of consecutive annual dividend increases.While only a smattering of S&P 500 companies can boast the same track record, you shouldn't buy a company based on the perceived stability of its dividend alone, regardless how impressive the streak. In this series, we scrutinize popular dividend stocks to determine if a particular favorite is a dividend beast, backslider, or bust. Let's delve into Parker-Hannifin's business to see how it measures up.

Parker-Hannifin provides engineered products and solutions across multiple industries, ranging from simple brass and steel couplings to hydrogen fuel cells for jet engines. The company focuses on nine major technologies: aerospace, climate control, electromechanical solutions, filtration, fluid and gas handling, hydraulics, pneumatics, process control, and sealing and shielding. 

Cng Machine

CNG Natural Gas Fuel Dispenser, courtesy Parker-Hannifin 

While its fundamental components such as piping, coupling, and tubing are purchased by a wide range of companies, Parker-Hannifin also brings great expertise to higher-end engineered products, including the "CNG natural gas dispenser," which was designed as a fuel dispenser for natural gas powered vehicles in India. The company has placed roughly 500 of these fuel dispensers in India, and it plans to expand the CNG dispenser throughout Asia in the future. Parker-Hannifin also supplies fuel and hydraulic systems to the Airbus A350 XWB, a fuel-efficient composite aircraft, and is producing a fuel cell-powered auxiliary jet engine for Airbus, with the first prototype due within one to two years.

Elastic earnings
Because the company is so widely diversified, with the great majority of its products tied to the success of the manufacturing sector, Parker-Hannifin's management follows the Purchasing Managers' Index, or PMI, as a forward indicator of its future order rates and earnings potential. It also tracks aggregate statistics on global aircraft miles flown, as well as North American housing starts. Parker-Hannifin follows these three major indicators pretty seriously; current numbers are usually included in PH's quarterly SEC filings, and company executives frequently discuss changes in the indicators during earnings conference calls.

The close correlation between its order rates and these few key indicators bulks up PH's predictive muscle relative to its revenues and earnings. At the same time, the range of Parker-Hannifin's products over so many manufacturing disciplines, coupled with its footprint in 49 countries, means that the company has a high degree of sensitivity to the health of the global economy.

PH Net Income (TTM) Chart

PH Net Income (TTM) data by YCharts

In the chart above we see a valley formed by a massive earnings dip between 2009 and 2011, in the thick of the global recession. We can also see the vigor with which earnings bounced back as economic growth rates around the world recovered from negative to slightly positive territory. 

Are cash flows ample enough?
Companies with long-lived dividend streaks by necessity must maintain vigorous cash flows quarter after quarter, a characteristic evident in Parker-Hannifin's operations. For the six months ended Dec. 31, 2013 (the first two quarters of the company's 2014 fiscal year), Parker-Hannifin generated $540.1 million in operating cash flow, from $6.3 billion in net sales. This was more than enough to cover $134.7 million paid out in dividends, reasonable share repurchases of $103.7 million, capital expenditure of $111.8 million, and debt repayments of $115.5 million. It should be noted that the company received an additional net cash boost during the period of $202.5 million from the sale of 50% of a wholly owned subsidiary to GE Aviation. With manageable long-term debt (the company's debt to equity ratio is currently 43%), cash flows should provide an ample base for continued dividend increases in the near future, provided that business conditions remain relatively stable. 

Because cash flows are so important to "dividend streak" companies like PH, it's reasonable to get a sense of how such companies are valued relative to the cash they generate. Using the "Price to Free Cash Flow" ratio, we can compare Parker-Hannifin to bona-fide dividend beast and competitor Emerson Electric (NYSE:EMR), along with industry competitors Eaton Corporation (NYSE:ETN) and IDEX Corporation (NYSE:IEX). This ratio measures a company's price relative to its operating cash flow less capital expenditures.

PH Price to Free Cash Flow (TTM) Chart

PH Price to Free Cash Flow (TTM) data by YCharts

As a multiple of free cash flow, Parker-Hannifin's valuation is in line with its peers. Coupled with the company's moderate P/E ratio of 17.7, investors should possess a comfort level that the stock is reasonably valued vis-a-vis cash flows and earnings.

When a strength is also a risk
The risk inherent in owning a company like Parker-Hannifin is that due to its broad swath of competencies and markets, chances increase that at least one business segment will badly trail other segments at any given time, with the potential to affect earnings. This is the flip side of admirable diversification. Similar to competitor Emerson Electric, Parker-Hannifin is not afraid to trim underperforming assets and take a near-term charge against earnings when management identifies a weak division. In the company's second quarter of fiscal 2014, it recognized a gain of $413 million on the sale of its subsidiary interest (mentioned above) to GE Aviation. Management took advantage of the cushion provided by this one time gain to restructure an underperforming division (Worldwide Energy Products Division), incurring $183 million of asset impairment and intangible asset write downs. 

Too meager a dividend?
Finally, let's review the company's dividend and what that implies about its return. Parker-Hannifin's dividend yield stands at a modest 1.6%, which perhaps is surprising for a company that's been expanding its dividend for 57 years. However, when a corporation consistently improves earnings, and the market appreciates its growth potential, the yield on its dividend can be happily sabotaged by a rising stock price, rewarding patient shareholders. That's the case with Parker-Hannifin:

PH Total Return Price Chart

PH Total Return Price data by YCharts

You probably know where this is going
Parker-Hannifin, like peer Emerson Electric, is a dividend beast. With its wide exposure to long-term global economic growth and strong cash flows, the company has delivered impressive total returns to its shareholders. Though the global economy is still expanding gingerly, holding PH stock and reinvesting dividends for at least a three- to five-year period should reward the patient investor.

Would you like a free look at our list of nine great dividend-paying stocks?
It's no secret that dividend stocks as a group handily outperform their non-dividend paying brethren. The trick is identifying which dividend stocks in particular are the best. With this in mind, our top analysts put together a free list of nine high-yielding stocks that should be in every income investor's portfolio. To learn the identity of these stocks instantly and for free, all you have to do is click here now.

Asit Sharma has no position in any stocks mentioned. The Motley Fool recommends Emerson Electric Co.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers