Fastenal (FAST 0.04%) is a cyclical company that sells fasteners and tools to industrial companies like manufacturers. Despite a business that rises and falls along with economic activity, it has an impressive dividend history, with around a quarter of a century of annual increases under its belt. If you are a dividend growth investor, there are three things you need to watch about Fastenal today.
1. The big picture is weakening
Fastenal provides a pretty detailed look into the trends in its business. However, the top level is still very interesting. Daily sales rate growth hit a recent peak in the first quarter of 2022, as the world was still opening back up from the economic shutdowns used to slow the spread of the coronavirus. The peak value on this broad growth metric was 18.4%.
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To be fair, that's not really a sustainable number and was actually representative of the recovery taking place at the time. So a pullback was almost inevitable. And that's exactly what has happened. The worrisome part is that the rate has declined every single quarter since that high-water mark, with daily sales rate growth sitting at 5.9% in Q2 2023.
On the one hand, the figure is still positive, which is good news. On the other hand, the trend line is decidedly negative.
2. Key markets are causing the trouble
When you dig into what's behind the top-level weakness, you see that manufacturing (75% of sales) is in a downtrend. Although the end market daily sales rate growth for manufacturing remains in positive territory, it has slowed for about a year, hitting 10.4% in the second quarter of 2023. Meanwhile, the construction end market, which is smaller at about 10% of sales, shrank 8.8% in Q2 and has been in negative territory for roughly three quarters. Once again, the trends are not good.
Looking at product categories, Fastenal's safety supplies and "remaining products" (together around two-thirds of revenue) have been holding up fairly well over the past year or so. But fastener sales have plunged, and the daily sales rate growth for this product group is now zero.
The big takeaway here is that this industrial company's business isn't exactly falling into disrepair, but some key markets are notably slowing down, which is having a major impact at the top level. This could be an early sign of broader weakness to come.
3. Cyclical swings can open up buying opportunities
If you are a long-term shareholder of Fastenal, you probably shouldn't sell it. After all, the company's business is cyclical in nature and the weakness today is kind of par for the course. Business cycles include both good times and bad ones. But if you don't own Fastenal, now might be a good time to start watching the stock more closely.
FAST Dividend Yield data by YCharts
Often, the best time to buy a cyclical stock that has a long and proven track record of success is during weak patches. While Wall Street is thinking short term, worrying about the impact of a downturn, you have a chance to pick up a great company on the cheap. To put some numbers on that, Fastenal's dividend yield is around 2.4% today, which is moderately attractive historically speaking. But if the yield were to pop up to around 3%, the stock would look incredibly attractive to long-term-focused dividend growth investors. Indeed, Fastenal's dividend growth over the past decade averaged around 14% a year.
Watch Fastenal's growth as you await a buying opportunity
Fastenal doesn't go on sale very often, which shouldn't be surprising given its strong dividend growth history. If you are a dividend investor, now is the time to start paying extra attention to the company's business. Yes, sales trends are weakening. But if history is any guide, that could open up a great long-term buying opportunity for investors willing to take a contrarian view of a cyclical company with an impressive track record of success.
