One quick (and maybe overly simple) way to shop for bargains among steady dividend growth stocks is to look for a dividend yield trading above its three-year average. This is the case for the three dividend growth stocks we will examine today.
EBAY dividend yield; data by YCharts.
However, that's not the only reason to like eBay (EBAY 1.40%), Pool (POOL 0.52%), and Thor Industries (THO 0.64%). All three are attractively valued and have excellent operations. This combination of dirt-cheap valuation, recently higher dividend yields, and steady growth make these three businesses fantastic decades-long holdings. Let's dive in.
1. eBay
With a price-to-sales (P/S) ratio of 2.6, e-commerce site eBay and its asset-light operations can now be purchased at a valuation it only saw briefly in 2015 and 2019.
EBAY PS ratio; data by YCharts.
Hit by year-over-year revenue declines of 5%, 6%, and 2% (excluding foreign exchange impacts) over the first three quarters of 2022, eBay's stock has declined 33% year to date.
Similarly, its trailing-12-month free cash flow (FCF) also tumbled as the company continued to lap formidable pandemic-aided comparable figures from 2021.
Despite this decline, eBay still trades at 18 times FCF, way below the S&P 500 index's median figure of 41. Along with this cheap-looking valuation, eBay has two key operational drivers that could propel its stock price upward.
EBAY free cash flow; data by YCharts.
First, its "focus categories" -- such as trading cards, refurbished goods, and auto parts and accessories -- delivered gross merchandise volume (GMV) growth 7 percentage points higher than the rest of the company's platform. Trading card GMV has more than doubled since 2019, while the rest of the focus categories grew by roughly 20% over the same time.
Second, eBay's advertising business delivered 27% growth (minus currency effects) in the third quarter compared to last year despite GMV declining 5% over the same time. Already accounting for 12% of eBay's revenue in the third quarter of 2022, these ads only have a GMV penetration rate of 1.6%, implying there is plenty of runway remaining for these high-margin sales.
On top of these growth drivers and a dirt-cheap valuation, eBay pays a 2% dividend that only uses roughly one-third of the company's FCF, and it has lowered its shares outstanding by 47% over the last five years. Thanks to this amalgamation of factors, eBay looks like a tremendous dirt-cheap investment to hold for the next decade.
2. Pool
Anyone who owns a pool also needs to maintain it. That's where Pool Corporation comes in. It is the world's largest wholesale distributor of swimming pool supplies. And with a price-to-earnings (P/E) ratio of 16, its shares today are trading at a cheap valuation not seen in over a decade.
POOL PE ratio; data by YCharts.
Despite growing sales and earnings per share (EPS) in all three quarters so far in 2022 compared to last year -- capped by 14% revenue growth in the third quarter -- Pool's stock has slid roughly 40% year to date as the market expects a slowdown.
Thanks to this freshly lower price and a once-in-a-decade valuation, Pool's operations deserve a look from dividend investors despite a potential deceleration in growth. With roughly 80% of the company's sales coming from maintenance, refurbishments, and repairs, most of the revenue is in the form of recurring sources.
The average swimming pool in North America is 25 years old, and Pool stands to benefit through the maintenance, refurbishment, or replacement of these aging pools.
Impressively, the company has grown EPS and FCF per share by 985% and 158%, respectively over the last decade -- and that's despite spending over $500 million in cash to build its inventory as it expands.
POOL shares outstanding; data by YCharts.
Most importantly for investors, Pool has shown a commitment to returning cash to shareholders through dividends and share buybacks. Its dividend has increased for 12 straight years and currently sports a yield of 1.2%. And with a payout ratio of just 18%, the dividend has a long runway for future growth.
Powered by the twin engines of strong returns to shareholders and the company's large percentage of non-discretionary recurring revenue, Pool's historically cheap valuation shouldn't be ignored at today's prices.
3. Thor Industries
If you're looking to hit the road in a motor home, chances are you may turn to Thor Industries. The Indiana-based company is the world largest maker of recreational vehicles. But what may most interest investors is the stock's P/S ratio of just 0.29, which is near an all-time low valuation.
THO PS ratio; data by YCharts.
Despite recording new all-time highs in sales and operating cash flow at $16.3 billion and $990 million, respectively, Thor's stock has dropped 11% so far in 2022.
With a leading market share for every category of towable and motorized RVs, Thor still has an $8.8 billion backlog of orders despite its incredible sales in 2022. Thanks to figures like these, the company has managed continuous profitability since 1980, an astonishing feat for a company operating in what is generally considered a highly cyclical industry.
The stock today offers a 1.9% dividend, and Thor uses just 8% of its net income to fund that payout, suggesting that its 11-year streak of dividend increases is only just beginning.
Best yet for investors, while the company might be forced to lap record-setting sales figures, 98% of its new RV owners said they intend to buy again, according to a Thor-conducted study. Existing RV owners say they plan to repurchase within the next five years, and 31% of those surveyed who don't own an RV said they plan to buy one at some point.
With Thor's dirt-cheap P/S ratio, steady profitability, growing cash flows, and large backlog, its shares look like an attractive opportunity for investors today.
