Industrial and construction supplier, Fastenal (NASDAQ:FAST), has a simple approach to business. Its motto -- "Growth Through Customer Service" -- focuses on recruiting quality employees (now numbering over 21,000) to find new customers and then grow alongside them. It's a formula that's been working, as sales have grown at a compound annual rate of 10% since 2009. 

Notably, this dividend payer has also shared its success with shareholders by growing its annual payout over 14% annually in that same period. Read on to find out how this company is on track to enjoy continued success and why it should have a place in your portfolio.

Fastenal employees standing in front of a company truck and store location

Image source: Fastenal

A shifting growth model

Fastenal started over 50 years ago, supplying threaded fasteners to small businesses, and it has grown into an industrial supplier with nine major product lines that include safety, welding, and janitorial supplies.

Historically, Fastenal has used public stores to get -- and stay -- close to its customers. These are located strategically within distribution networks and service more than one customer. District and branch employees are empowered to customize stock to suit a particular area need, which reflects the conviction that employees are one of the company's main strengths.

More recently, Fastenal's main source of growth has shifted to onsite locations and industrial vending devices. Both opportunities bring Fastenal directly under its customers' roofs. For example, the company's vending devices are placed directly in work areas around a customer's facility, similar to food and drink machines, and they're stocked with items that would normally be kept at a facility's central warehouse. These can include safety gear, tools, cleaning items, rigging, and of course, fasteners. 

The convenience for busy workers is obvious, but companies can also save money by allowing users to get what they need to finish the job instead of stashing extra inventory in toolboxes or around work areas with the hope of avoiding extra trips to the warehouse. Fastenal, of course, supplies all the inventory and can increase sales by supplying items previously provided by other vendors. Warehouse inventory decreases, which offers its own savings for clients.

The value proposition is expanded with the company's digital solutions segment. Here, it overlaps the physical inventory monitoring and document exchange such as purchase orders, shipping notices, and invoices with a customer's Enterprise Resource Planning (ERP) system. 

Promising results

Management believes the total revenue from onsite locations will grow "materially over time." As of March 2019, the company had 83,410 vending devices installed, and it believes the market can support up to 1.7 million. The expansion of these newer segments can be seen below with the spike in the number of onsite locations as well as the total number of company vending devices installed: 

Segment 2017 Growth 2018 Growth 2019 Growth Estimate
Active Onsite Locations 50.9% 47.7% Not Provided
Vending Devices  13.7% 13.6% 28% to 31%

Overall net sales growth has accelerated accordingly in the last three years from 2.4% in 2016 to 10.8% in 2017 and 13.1% in 2018. That growth has continued into the current year -- management recently noted:

We also experienced growth in sales to 81 of our top 100 customers in the first quarter of 2019, which compares to growth in sales to 78 of our top 100 customers in the first quarter of 2018. These metrics describe healthy general industrial activity in our markets.

Certainly a good domestic economy helps a company that supplies industrial manufacturing, especially when almost 86% of 2018 sales were in the U.S. With a customer base consisting mainly of manufacturing and non-residential construction markets, business can be cyclical. However, management states, "We believe our model has certain protections that moderate the volatility of our results around cyclical changes." These protections include a large number of customers that operate within a wide range of segments and industries.

A stock to own

In the most recently reported quarter, revenue was up 10.4% year over year. Meanwhile, management also paid out $123 million in dividends. Shareholders should feel confident that the recent dividend growth will continue. Dividends paid as a percentage of net earnings have declined from almost 70% in 2016 to less than 60% last year. The company has paid quarterly dividends since 2011 and has made clear its intention to sustain that course.  

Shares of Fastenal have gained 24% year to date as of this writing and currently trade at 23 times forward earnings. It should also be noted that the company has announced a 2:1 stock split that will be effective after the market close on May 22, 2019.

Despite a cyclical business and client base, investors shouldn't be scared to start a position in this company, even after the gains put up this year. Fastenal has significant market opportunities like vending machine forging new paths to growth, and the company is simultaneously strengthening its relationship with customers, creating a pinwheel effect that will deliver sustainable results. Investors should feel good about partnering with a proven management team focused on its employees, clients, and shareholders.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.