Published on July 31st, 2022 by Nathan Parsh
The term “blue chip” can have a different definition to different investors. Typically, this term is applied to companies that meets a certain criteria, such as an industry leader.
To us, a stock earns the title of blue chip when it has at least a decade of dividend growth. A minimal dividend growth streak of 10 years means that the company’s business model can provide steady growth, even under difficult economic conditions.
As a result, we feel that blue chip stocks are among the safest dividend stocks that investors can buy.
With all this in mind, we created a list of 350+ blue-chip stocks which you can download by clicking below:
This installment of the 2022 Blue Chip Stocks in Focus series will examine Polaris Inc. (PII) in greater detail.
Polaris was founded in 1954 and has grown to become a leading company in the specialized vehicle industry. The company designs and manufactures a wide variety of vehicles, including all-terrain vehicles, motorcycles, and snowmobiles. Polaris also provides accessories and replacement parts for these vehicles through its dealers in the U.S. Polaris has a market capitalization approaching $7 billion and generates annual revenue of more than $8 billion.
Source: Investor Presentation
Polaris reported second quarter earnings results on July 26th, 2022. Revenue increased 8% to $2.1 billion while adjusted earnings-per-share of $2.42 compared unfavorably to $2.70 in the previous year. However, the company topped analysts’ estimates for both revenue and earnings-per-share.
Off-Road, which accounts for nearly three-quarters of revenue, grew 7%. Price increases and pre-sold orders more than offset lower volume. Volume was down primarily because of component availability as supply chains continue to be an issue for the company, though this was a slight improvement on a sequential basis.
The company’s Marine segment led the way with 38% growth as this business benefited from increased demand, higher realized prices, and favorable product mix.
Revenue for the On-Road segment was flat compared to the previous year as supply chain constraints limited shipments. Powersports aftermarket was higher by 24%.
Polaris provided revised guidance as well, with the company now guiding towards revenue growth of 13% to 16% for 2022, compared to 12% to 15% previously. Adjusted earnings-per-share are now expected in a range of $10.10 to $10.30, down from $10.10 to $10.40 previously.
Polaris has several factors working in its favor. First, the company provides well-known brands, such as Polaris, Ranger, Slingshot, Sportsman, and Transamerican Auto Parts. These brands are trusted by consumers looking for high-quality vehicles and replacement parts, giving Polaris an advantage over peers.
Next, the aftermarket business remains very lucrative for the company. Margins are usually higher for aftermarket products and services.
Third, Polaris has been an aggressive acquirer of companies to strength its core business. This activity serves several purposes, including adding key businesses to its portfolio to improve its product offerings. This also reduces the number of would-be competitors that could impact the company.
In 2016, Polaris purchased Taylor-Dunn Manufacturing, gaining the company a foothold in the jeep and four-wheel-drive truck aftermarket parts and accessories industry, which is valued at $10 billion annually. That same year, Polaris added Transamerican Auto Parts, a leading aftermarket services company.
Polaris followed this up with its 2018 addition of Boat Holdings, which specializes in pontoons and deck boats and further enhanced the company’s Marine business.
Because of its dominate market position and willingness to use capital to grow its business, we forecast that Polaris will grow earnings-per-share at an annual rate of 4% through 2027.
Competitive Advantages & Recession Performance
The specialty vehicle industry is not without competitive pressures. Polaris’ primary competitors include Harley-Davidson (HOG) and Honda (HMC).
That said, the company is one of the most sought-after manufacturers of specialty vehicles. Polaris ranks number in all-terrain vehicles and the number two for snowmobiles and motorcycles in the U.S.
Because of this, the company is able to raise prices without hindering demand to a large degree. This was seen in the last quarter where Polaris’ realized prices increased year-over-year with demand remaining elevated. Volumes would have been even higher if not for supply chains limiting product availability.
Given that it operates in a cyclical industry, Polaris was impacted by the Great Recession. Below are the company earnings-per-share totals before, during, and after the last recession.
- 2006 earnings-per-share: $1.36
- 2007 earnings-per-share: $1.55 (14% increase)
- 2008 earnings-per-share: $1.75 (13% increase)
- 2009 earnings-per-share: $1.53 (13% decrease)
- 2010 earnings-per-share: $2.14 (40% increase)
- 2011 earnings-per-share: $3.20 (50% increase)
- 2012 earnings-per-share: $4.40 (38% increase)
Initially, Polaris saw double-digit gains during the last recession, before the company’s earnings-per-share suffered a decline 2019. However, the Polaris did see an immediate turnaround in its business and established a new high for earnings-per-share in 2010. Outside of 2016, the company has generally seen higher year-over-year growth rates as Polaris has reached a new high for earnings-per-share almost every year.
At the same time, the company has established a solid dividend growth streak. Polaris has raised its dividend for 26 consecutive years, including a nearly 15% increase for the 2007 to 2009 period. The company’s dividend has a compound annual growth rate of 6.1% over the last decade. Due to its long history of dividend growth, Polaris qualifies as a Dividend Champion.
Polaris has a projected payout ratio of just 25% for this year, which should provide ample room for years of dividend growth going forward. Shares of the company yield 2.2%, above the 1.6% average yield for the S&P 500 Index.
Valuation & Expected Returns
Polaris recently traded at $117, meaning the stock is trading at 11.5 times the midpoint of company guidance for 2022. We have a five-year target valuation of 15 times earnings, which we believe takes into account the quality of the company, but also its cyclicality.
Therefore, multiple expansion could add 5.5% to annual returns if Polaris were to trade with our valuation target by 2027.
Total annual returns are projected to be 11.6% over the next five years. This return stems from a 4% earnings growth rate, 2.2% starting dividend yield, and a mid-single-digit contribution from multiple expansion. Given total return potential, Polaris earns a buy recommendation from Sure Dividend.
Polaris operates in a niche business that does have sensitivity to the overall health of the economy. The company’s products are largely discretionary items.
That said, Polaris demonstrated during the 2007 to 2009 period that a recession isn’t a major obstacle to the business. Earnings-per-share grew in 2008 before suffering a relatively small decline in 2009. The company also has a habit of reaching new highs for earnings-per-share on a regular basis.
Polaris’ dividend growth streak is nearing three decades and the stock offers a yield above that of the market average. More than that, Polaris’ stock looks poised to deliver double-digit returns over the next five years, which suggests the stock could be a good option for those looking for exposure to the specialty vehicle market.
The Blue Chips list is not the only way to quickly screen for stocks that regularly pay rising dividends.
- The Dividend Aristocrats: S&P 500 stocks with 25+ years of consecutive dividend increases.
- The High Yield Dividend Aristocrats List is comprised of the Dividend Aristocrats with the highest current yields.
- The Dividend Kings List is even more exclusive than the Dividend Aristocrats. It is comprised of 44 stocks with 50+ years of consecutive dividend increases.
- The High Yield Dividend Kings List is comprised of the 20 Dividend Kings with the highest current yields.
- The High Dividend Stocks List: stocks that appeal to investors interested in the highest yields of 5% or more.
- The Monthly Dividend Stocks List: stocks that pay dividends every month, for 12 dividend payments per year.
- The 20 Highest Yielding Monthly Dividend Stocks: Monthly dividend stocks with the highest current yields.
- The Dividend Champions List: stocks that have increased their dividends for 25+ consecutive years.
Note: Not all Dividend Champions are Dividend Aristocrats because Dividend Aristocrats have additional requirements like being in The S&P 500.
- The Dividend Contenders List: 10-24 consecutive years of dividend increases.
- The Dividend Challengers List: 5-9 consecutive years of dividend increases.
- The Complete List of Russell 2000 Stocks: arguably the world’s best-known benchmark for small-cap U.S. stocks.
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- The 2022 High ROIC Stocks List: The top 10 stocks with high returns on invested capital.
- The 2022 High Beta Stocks List: The 100 stocks in the S&P 500 Index with the highest beta.
- The 2022 Low Beta Stocks List: The 100 stocks in the S&P 500 Index with the lowest beta.