Fastenal (FAST 0.04%) is a standout as a dividend stock. Not only has it increased its payout annually for roughly a quarter century, but the average annualized dividend increase over the past decade also was a very attractive 14%.
You don't create a record like that by accident. There are many positive financial attributes that can be highlighted here, but one that is hard to see is the success it has created by being a good partner to its customers.
The model works
A company with a long history of success likely has a good business model. Fastenal sells small products, like fasteners and tools, that are used on a regular basis by its industrial customers.
That's not a bad business, but it isn't exactly unique. There's something more going on that has helped Fastenal build such an impressive dividend history.
Image source: Getty Images.
A big part of what has allowed the company to grow at such a rapid clip is its intense focus on working with its customers to create mutually beneficial outcomes. During the company's second quarter earnings call, management provided three examples that highlight this approach.
Fixing a supply chain
In one recent situation, Fastenal took on a new customer and examined its current supply chain. That's normal, since Fastenal basically steps in to replace other suppliers and needs to make sure that it can competently replicate or improve on the existing relationship.
As Fastenal looked at the supply chain, it noticed that the new customer had 14 months of supply for a particular item it needed. That's not a positive because excess inventory can weigh on profitability by tying up cash that could be used elsewhere.
Instead of simply maintaining that elevated level of inventory, Fastenal worked out a plan to reduce it over time. That meant that it sold fewer products to the new customer for a fairly long time, given the surplus inventory on hand. In short, to put its customer in a better position, Fastenal made less money. But it likely created a positive relationship that will last for years.
Implementing the best system
In another situation, Fastenal took on a customer that was staffing its supply chain operation 24 hours a day to ensure it had access to the items it needed. Not only is it costly to have people available all day, every day, but it is also hard to find employees willing to come in late at night. Fastenal worked with the company to implement a supply chain system unique to the customer that allowed for just 10 hours of staffing.
The really important part of that story is that it is much easier for a company like Fastenal to offer cookie-cutter solutions, so it can just replicate business relationships over and over again with minimal extra work. Many situations are probably as easy as that, but when faced with one that wasn't, Fastenal worked to find a solution that was better for the customer. Again, putting in that extra effort likely created a huge amount of goodwill.
Better for everyone
The two examples above are unique to the customers involved. But another recent example cited in the earnings call was far more pervasive. During the pandemic, supply chains were under a huge amount of strain. The illness disrupted production and logistics, leaving customers at risk of running short of key parts. Fastenal therefore increased its own inventory levels.
It wanted to be sure that none of its customers had to shut down because they couldn't get a part. The cost to Fastenal was tying up more cash in its own inventory, which it knew would eventually be a headwind when the supply chain disruptions eased.
But it was willing to deal with the drag of working off excess inventory to make sure that its customers never had to doubt their relationship with a key supplier. Being able to operate like usual in difficult times is something that an industrial customer isn't likely to forget.
Word gets around
These are simple examples of how Fastenal treats its customers as partners. Each case is individually important, but there's a snowball effect as well.
When Fastenal makes a call to a potential customer, that company is likely to know about Fastenal's strong reputation (or it will quickly find out through references). And that reputation, which isn't a tangible item you can track via financial statements, makes building the business easier over time.
Dividend investors benefit from this approach because it leads to strong business growth and large dividend hikes. Given that being a good partner is built into Fastenal's DNA, there's a good chance the company's customers and shareholders will both continue to be very happy with its success for years to come.
