What happened
Shares of WD-40 (WDFC 0.14%), a company with a portfolio of lubricating and cleaning products, jumped to 52-week highs on Tuesday after the company reported results for its fiscal third quarter of 2023. As of 10:40 a.m. ET, WD-40 stock was up a whopping 20%.
So what
Third-quarter revenue was $141.7 million, right about what management expected. For evidence, consider that management merely affirmed its full-year guidance rather than raise it, suggesting third-quarter results were in line with its outlook.
While the top-line number was as expected, WD-40 did make important progress on the bottom line. As with many companies selling physical goods, inflation has challenged profitability. But in the quarter, gross-profit margin and earnings per share (EPS) continued normalizing to historical levels.
WD-40's gross margin came in at 50.6% compared to 47.7% in the prior-year quarter. And its third-quarter EPS was $1.38, up 29% year over year. As the chart below shows, these numbers are still below historical norms, but it's an improvement nonetheless, and the market likes it.
WDFC revenue (quarterly) data by YCharts.
Now what
Like many lower-growth companies, WD-40 returns a lot of its earnings to shareholders via dividends. One thing to monitor is its payout ratio: The company expects to have EPS of $5 in fiscal 2023 at most, and it's currently paying an annualized dividend of $3.32 per share. That 66% forward payout ratio is a little high.
The way to bring the payout ratio down is by growing profits. But the company already implemented price increases to improve profitability. Continuing to raise prices to boost EPS further could jeopardize sales, something it might not want to risk.
WD-40 is a strong company. But future dividend increases might not be what investors are accustomed to, unless it can find a path to keep its EPS growth going.
