As 2020 finally draws to a close, income investors are undoubtedly looking ahead to greater stability in 2021. The COVID-19 pandemic stymied cash flows and curbed dividend payments across mature, stable industries that usually reward dividend investors, even as non-dividend-paying stocks in capital-light tech sectors soared. For those looking for new opportunities in 2021, it's fruitful to consider companies that exhibited strength, and both maintained and raised their payouts this year.
One such candidate is recreational vehicle (RV) maker Thor Industries (THO -0.16%), which issued its first-quarter fiscal 2021 results earlier this month on Dec. 8. Let's briefly review the company's results in the context of the coming year, and discuss Thor's potential as a successful dividend investment.
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A positive earnings trend
Thor and its peers in the RV industry are continuing to prosper from a pandemic-influenced tailwind as outdoor, "lifestyle" activities have blossomed in 2020. In its first quarter of fiscal 2021, Thor reported a sales increase of 17.5% year over year, to $2.5 billion, while gross margin improved by 60 basis points to nearly 15%.
All three of Thor's business divisions enjoyed growth during the quarter. The company's North American towable RV and motorized segments reported 16% and 19% year-over-year revenue advances, respectively, while European RV sales increased by 22%.
The manufacturer coupled its sales and gross profitability momentum with a decrease in overhead spending. As a percentage of revenue, selling, general, and administrative expenses (SG&A) dipped by 150 basis points to 7.2% of the top line, or $182 million. As a result, Thor's net income soared by roughly $63 million against the prior-year quarter, to $114 million, and diluted earnings per share (EPS) increased by 223%, to $2.05.
But Thor's order backlog is certainly the most impressive figure from its earnings report. Total unfilled orders nearly tripled to almost $9 billion against the prior-year period, as orders for RVs -- especially for less expensive towable models -- are continuing to flow in.
Positive backlog numbers come with a slight caveat. The last time industry demand was this strong, in 2018, it signaled a peak in the fortunes of RV makers, as retail customers were just beginning to turn more cautious around big, discretionary consumer goods purchases. Dealers were caught with excessive inventories on their lots, and order cancellations drastically trimmed then-healthy backlogs.
This year probably won't present an analogous situation, as Thor has enjoyed strong lifestyle-driven demand during a recession, albeit one caused by the pandemic. As the global economy recovers, potential RV purchasers should theoretically find themselves in a stronger financial position. A reasonable scenario is that consumer RV demand will soften, but not dramatically, as a return to pre-COVID life quells a bit of outdoor wanderlust.
The dividend angle for income investors
Thor may have enjoyed firmer sales throughout 2020, but maintaining and increasing its was never a certainty, as COVID-19-related supply chain issues have created a challenging production environment. However, the company was able to manage its working capital successfully this year, and raised its quarterly dividend in November by a modest 2.5%, to $0.41.
At current share price, this equates to a yield of 1.7%. Thor's dividend payout ratio is only 31%, implying that it has plenty of capacity to initiative future payout hikes. I believe Thor's $9 billion backlog, which exceeds fiscal 2020's entire revenue total of $8.2 billion, bodes well for a significant jump in cash flow generation over the next several quarters.
Thor will undoubtedly use some of this cash to pay down debt associated with its purchase of Erwin Hymer Group (now its European segment) last year. Thor has already reduced its long-term debt balance from $2.2 billion following the February 2019 transaction to $1.6 billion as of the end of the first quarter of fiscal 2021. Management is also likely to continue to invest in manufacturing facilities and undertake small, bolt-on acquisitions -- the EHG purchase was an exception because of its size.
Funds remaining after the yearly priorities of debt reduction and capital investment will thus benefit income investors -- management hasn't aggressively repurchased shares in the past, favoring dividend payout increases instead. When we consider Thor's rather cheap market pricing of just 13 times forward earnings, it's apparent that long-term income investors have an opportunity to realize appreciable total return in 2021 -- and beyond.
