In some ways, Fastenal (FAST 0.04%) is an incredibly boring industrial company. In other ways, it's quite exciting. However you view it, though, there's one thing it has done for investors amazingly well: grow its dividend. Over the past decade, for example, the payout has increased at an annual rate of 14%. That's huge, but here are some more reasons to like this no-brainer dividend growth stock.
1. The top and bottom lines
Fastenal sells fasteners and other small parts and tools that industrial companies use to build their products. It is not a sexy business, but it is a reliable one since there's a near-constant need to replace used items.
For a long time, the company operated stores, which it still does, but it has been increasingly integrating into the businesses it serves. That can take the form of regular deliveries to a manufacturing site or even vending machines that a customer's employees use.
The big picture here, however, is that Fastenal is both an important supplier and increasingly integral to its customers' supply chains. Being a key partner has resulted in long-term sales and earnings growth, as the chart below highlights.
FAST revenue (annual) data by YCharts.
The trend isn't uninterrupted; the Great Recession was a particularly tough time. But it is the long-term growth of the business that underpins the company's ability to pay a steadily rising dividend.
2. A strong foundation
While sales and earnings growth are important in supporting dividend growth, the balance sheet is also worth highlighting. Companies with too much leverage can have a difficult time increasing dividends because so much of their cash has to go toward interest expenses.
That's not the case here. As the chart below shows, Fastenal's debt-to-equity ratio is a very modest 0.12. The highest point over the past decade was still below 0.25, which itself is a low figure.
FAST debt-to-equity ratio data by YCharts.
To emphasize just how low the company's leverage is, you can also look at times interest earned. Essentially, the company's earnings before interest and taxes cover interest expenses by 100-fold! There should be few concerns about debt levels at Fastenal, which makes the dividend that much safer.
FAST times interest earned (TTM) data by YCharts. TTM = trailing 12 months.
3. Ample coverage
The next graph is a little less compelling. It shows the company's dividend payout ratio, which is basically dividends as a percentage of earnings. The figure today is roughly 66%, which is not low. And yet it isn't overly high, either.
FAST payout ratio data by YCharts.
The payout ratio has been higher and lower over the past decade, but it has generally hovered between 50% and 66%. Given the modest debt burden, that's probably a reasonable range. That said, during hard times, investors should probably be prepared to see the payout ratio spike toward 100%.
4. A proven history
Hard times are inevitable for any business. What's important is how a company manages through the difficult periods. And for Fastenal, one important fact is that it has continued to increase its dividend through thick and thin, including during the Great Recession.
The annual streak is currently up to 24 years. The dividend was increased again in January, so the board is already working on hitting the quarter-century mark.
FAST dividend per share (annual) data by YCharts.
And, as noted above, the annualized increase over the past decade was a huge 14%. Using the rule of 72, the dividend would double in a little over five years at that rate. Dividend growth investors should find that incredibly compelling even though the starting dividend yield is a bit modest at just 2.4% today. But dividend growth will steadily push up your yield based on your purchase price.
Time for a deep dive
Fastenal is not a cheap stock -- the shares currently trade at about 29 times forward earnings -- but given its strong history of growth (and dividend growth in particular), that shouldn't be too shocking. If you are willing to pay full price for a great company that has a proven history of rewarding investors with robust dividend growth, it is worth a very close look.
That's true even if you just put it on your wish list, in case there's a market sell-off that leaves the shares sitting on the sale rack. A dividend yield of around 3% would probably represent a great buying opportunity.
