2020 has seen a truckload of dividend cuts, suspended payouts, and unhappy shareholders, especially from high-profile companies like Disney and Ford. However, there are plenty of lesser-known companies that have increased their payouts to shareholders this year... and it's not too late to get in on the action!
We asked three of our Motley Fool contributors if they knew about any under-the-radar companies that are rewarding their shareholders with increased or special dividends. They came back with Fastenal (FAST 0.09%), MSC Industrial (MSM 0.77%), and Kirkland Lake Gold (KL). Here's what these companies are offering and how you can profit.
Image source: Getty Images.
Off the beaten path
John Bromels (Fastenal): Fastenal isn't a company most investors know. The $27 billion distributor of industrial products supplies equipment of all types, from nuts and bolts to tape dispensers to welding masks. Its biggest markets, though, are in fasteners (hence the name) and safety equipment.
Fastenal's sales have increased this year due to high demand for safety equipment, especially personal protective equipment (PPE). However, in its Q3 earnings report, management indicated that the market for PPE was now oversupplied and that while sales were still brisk, Fastenal was seeing its PPE margins contract. Meanwhile, industrial equipment sales took a big hit and are only slowly beginning to recover. So the year has been a mixed bag for Fastenal.
From a dividend perspective, though, Fastenal is doing just fine. Management just announced it would pay a special dividend for the first time since 2012. Shareholders of record as of December 2 will receive an extra payment of $0.40/share -- about 0.8% at today's share price -- on December 22. That's in addition to the company's ordinary dividend, which currently yields about 2.1%.
A glance at Fastenal's recent cash flow shows the company should have no trouble making this extra gift to shareholders:
FAST Free Cash Flow Per Share data by YCharts
Fastenal may hit a bit of a rough patch over the next several months as PPE margins shrink and fastener sales slowly return to normal. However, a special dividend is a good way to reward income investors for their patience.
MSC Industrial loves dividends
Lee Samaha (MSC Industrial): If you are looking for a shareholder-friendly company then MSC Industrial Direct might just fit the bill. The industrial supply company currently sports a 3.5% dividend yield and shareholders on the record at the close of business on Dec.1 2020 will receive a special cash dividend of $3.50 per share.
For an idea of how well covered its dividend is here's a comparison of earnings per share, and free cash flow per share to dividend per share. Clearly, there's no issue for the company in meeting its dividend in the near term.
Data by YCharts
That said, there are some longer-term concerns with the company, not least of which is a downward trend in its operating margin.
Data by YCharts
Moreover, MSC Industrial looks like it's going to be late to the recovery party in 2021, as its manufacturing customers remains cautious on spending. For example, on is most recent earnings call CEO Erik Gershwind referred to "Many national accounts are running one shift as opposed to the two or three shifts they were running pre-pandemic. Our job shop and machine shop customers continue carrying smaller-than-normal backlogs."
It's a view that was matched on Stanley Black & Decker's earnings call with its CFO Don Allan outlining that its industrial fastener sales had declined by a high-teens percentage in the quarter as "the majority of the manufacturers are balancing the initial surge and pent-up demand following the Q2 closures, with a slower trajectory toward normalized business activity."
Clearly, it could be a quarter or two before MSC Industrial starts reporting some good news, so be prepared for some near-term disappointment. Nevertheless, if you can ignore some weak news flow and believe that the industrial economy will recover through 2021 then MSC Industrial could be a very rewarding stock for income-seeking investors.
Take a walk down the yellow brick road
Scott Levine (Kirkland Lake Gold): I know, I know. When digging into possible dividend options, gold stocks aren't rising to the top of your buylists; nevertheless, there are some valid reasons to consider Kirkland Lake, a leading gold producer, as a worthwhile dividend opportunity.
As political turmoil continues to roil Washington and rising COVID-19 cases hint at future lockdowns, the adoption of a more defensive position in one's portfolio seems like a reasonable approach for both conservative and non-conservative investors alike. Moreover, Goldman Sachs believes that the price of gold is poised to pop higher due to (among other things) a weakening dollar and growing demand in emerging markets. After the price of gold reached an all-time high of about $2,070 per ounce in August, the price of the yellow stuff has retreated, trading at an average price of about $1,890 per ounce in November. Goldman Sachs, however, is expecting it to rise again, forecasting that it will trade as high as $2,300 per ounce over the next year.
Kirkland Lake Gold's management has demonstrated a strong commitment to rewarding shareholders this year through its dividend. In the first quarter of 2020, Kirkland Lake had doubled its quarterly distribution to $0.125 per share, and in Q3, the company announced an additional 50% increase to the dividend, which is now $0.1875 per share and represents a 1.8% forward yield.
While there's no guarantee that future dividend raises are in the cards for Kirkland Lake, there's reason to believe that management will once again decide to raise the payout to shareholders. For one, the company's payout ratio over a trailing-12-month basis has been a very conservative 15.3%, according to Morningstar, suggesting that the company can return more cash to shareholders without jeopardizing the company's financial health. In addition, Kirkland Lake has a robust balance sheet that has zero debt, so the company can continue to raise the dividend without having to worry about servicing its debt.
Another auspicious sign of the company's ability to raise its dividend is its success at generating free cash flow. In its recent Q3 earnings report, Kirkland Lake announced that it had generated free cash flow (FCF) of $275 million. While it hasn't provided FCF guidance for the fourth quarter, the company has generated $694 million year to date and will likely surpass the $463 in FCF that it generated in 2019 thanks in large part to its recent acquisition of Detour Lake -- a cornerstone asset which will likely contribute to the company's financial well-being for years to come.
