If history is any indication, the best thing you can do with your cash is buy dividend stocks. Study after study reinforces the idea that dividend stocks outperform others by a wide margin.
For example, J.P. Morgan Asset Management found that stocks that initiated and then raised their payouts over the 40-year period between 1972 and 2012 returned an average of 9.5% annually versus just 1.6% for non-dividend-paying stocks.
That's why Smith & Wesson Brands' (SWBI -1.35%) decision to hike its payout 25% should make this stock a buy for income investors.
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Sharing success with investors
The firearms manufacturer began paying a quarterly dividend only following its spinoff of American Outdoor Brands in 2020. While that first dividend was $0.05 per share, Smith & Wesson hiked it 60% last year to $0.08 per share, and now, at the start of its third year of paying dividends, has raised it once more, to $0.10 per share.
Unlike rival Sturm, Ruger & Company, however, which has paid a dividend consistently since 2009 but does so according to a percentage of its net income (approximately 40%), Smith & Wesson's dividend is a fixed amount every quarter. While Ruger's dividend payment will fluctuate every quarter as its profits rise and fall, Smith & Wesson's remains steady.
CFO and Executive VP Deana McPherson says the board of directors was able to increase the dividend again because the gunmaker's "balance sheet remains strong with $120.7 million of cash and no debt, and we expect to continue generating strong cash flow for the foreseeable future."
Image source: Getty Images.
Primed for future growth
Smith & Wesson's fiscal fourth-quarter earnings report showed that while sales were down from last year, they still handily beat Wall Street's expectations. Revenue of $181 million fell 44% from the year-ago period but was well ahead of analysts' prediction of $168 million. Adjusted profits of $0.82 per share also trounced forecasts of $0.57 per share , though they were down 52% year over year.
Business should continue to be robust, even if it's down relative to last year, as it is returning to a more normalized trajectory, one that has always been of greater growth.
The Supreme Court just reaffirmed the Constitution protects the right to carry a firearm outside the home. Weapons designed for concealed carry are a significant part of Smith & Wesson's business, such as its M&P Shield line, which is one of the most popular pistols on the market. Some 5 million of the handguns have been sold since it was first introduced in 2012.
Smith & Wesson has partnered with Vista Outdoor's (VSTO 0.46%) Federal Premium Ammunition to launch their new 30 Super Carry ammo, which was developed specifically for the concealed carry market.
A deep value stock
In short, Smith & Wesson's business is solid, it's willing to share its success with investors through dividends and share buybacks, and its stock is steeply discounted.
You'll never find Smith & Wesson Brands trading at rich premiums, but even after the stock jumped over 21% last week, shares go for just three times trailing earnings, seven times next year's estimates, and a fraction of its sales and expected earnings growth rate . At less than four times free cash flow, the firearms maker is a bargain basement dividend stock that is a strong buy.
