Updated on November 4th, 2021 by Bob Ciura
Parker-Hannifin (PH) is in very exclusive company when it comes to its dividend track record. Parker-Hannifin has paid quarterly dividends to shareholders for the past 70+ years, and it has raised its dividend for 65 years running.
Parker-Hannifin has one of the top five longest-running dividend increase streaks in the S&P 500 Index.
This amazing accomplishment puts it in the elite Dividend Kings, a group of stocks that have increased their payouts for at least 50 consecutive years.
You can see the full list of all 32 Dividend Kings here.
Additionally, you can download your free copy of the entire Dividend Kings list (along with metrics that matter like price-to-earnings ratios and dividend yields) by clicking on the link below:
Dividend Kings are the best of the best when it comes to rewarding shareholders with higher cash returns each year.
This article will discuss Parker-Hannifin’s qualities that have put it in such rare company.
Parker-Hannifin was founded back in 1917 by Art Parker, who was an entrepreneurial man in every sense of the word. He used his penchant for solving engineering problems to file over 160 patents and created the foundation for what Parker-Hannifin has become today.
The company continues to embody Mr. Parker’s approach to solving the world’s engineering problems, and the formula has certainly worked over the past several decades.
Parker-Hannifin sells a wide array of components that help power the world’s factories and machines. Part of the company’s appeal is that it is so diversified in terms of product categories and offerings.
This affords it a very long and diverse customer list, meaning it isn’t reliant upon one or two industries for its revenue and profits.
Indeed, Parker-Hannifin is one of the most diversified industrial stocks.
Source: Investor Presentation
Parker-Hannifin’s market capitalization is right at $39 billion and the company generates annual revenue of approximately $14 billion.
The company operates in three major segments called Diversified Industrial North America, Diversified Industrial International, and Aerospace Systems.
The North America business is the largest segment of the three. This segment provides industrial solutions to engineering problems on a massive scale including valves and fittings, cylinders and actuators, hoses, piping, tubing and a host of other product categories.
The International business provides the same sort of solutions to its customers outside the US.
The Aerospace Systems business focuses on an industry where Parker-Hannifin has decades of experience in making the world’s aircraft more efficient and safer to operate.
Parker-Hannifin has seen somewhat lumpy earnings growth in recent years, as diversification of geographies and products has worked better in some years than others.
It is also not a very recession-resistant business; as an industrial, Parker-Hannifin is highly exposed to the global economy. For example, earnings-per-share declined in 2020 due to the coronavirus pandemic.
However, over the long run the company has done an excellent job generating growth.
Source: Investor Presentation
We believe the company has a strong 10% growth rate in front of it.
Parker-Hannifin reported a strong quarterly earnings report on November 4th, beating estimates on revenue and EPS, and raising guidance.
For the fiscal 2022 first quarter, sales increased 16.5% while adjusted earnings-per-share increased 40% year-over-year. EBITDA margin expanded 210 basis points, to 22.1%.
You can see a breakdown of the company’s performance across operating segments in the image below:
Source: Investor Presentation
Management guided for earnings-per-share of $16.95 to $17.65 for fiscal 2022. The company expects 6%-9% sales growth for the full year.
One reason we are bullish on the company’s prospects is its propensity to purchase growth via acquisitions.
Parker-Hannifin has made some significant acquisitions in recent years, with CLARCOR, Lord, and Exotic Metals being three examples.
More recently, the company announced a major $8.8 billion acquisition of Meggitt PLC. Meggitt is based in the U.K. and is a large aerospace and defense company with annual revenue of $2.3 billion in 2020.
The company’s focus on supportive acquisitions as well as improvement in its operating efficiency, should provide it with strong long-term earnings growth.
Competitive Advantages & Recession Performance
Parker-Hannifin’s competitive advantages include its scale, global distribution network, and its 100+ years of experience in solving engineering problems.
The company makes some relatively obscure – but very critical – components of heavy machinery, factory equipment, aircraft, etc. and competition in many of these arenas is light.
That plays into its hands when it comes to competitive advantage because in many cases, there is very little in terms of actual competition, and pricing power is commensurately high.
This is not to say that Parker-Hannifin is immune from recession, because that is far from the case. After all, its customers need customers of their own in order to justify production, which means that when a recession does strike, Parker-Hannifin suffers as well.
During the Great Recession, revenue fell from about $12B before the downturn to about $9B at the bottom.
Naturally, this had a corresponding negative impact on earnings-per-share in 2009, as shown below:
- 2007 earnings-per-share of $4.67
- 2008 earnings-per-share of $5.53 (18% increase)
- 2009 earnings-per-share of $3.13 (43% decline)
- 2010 earnings-per-share of $3.40 (8.6% increase)
However, revenue recovered to pre-crisis highs by 2011 so while it was painful to be sure, even something as traumatic as the Great Recessions wasn’t close to a death knell for Parker-Hannifin.
This company isn’t beholden to any one particular industry and that diversification of product offerings and customers is what helps it weather economic storms.
Valuation & Expected Returns
Based on the midpoint of EPS guidance ($17.30) shares of Parker-Hannifin trade for a forward P/E ratio of 18.9. This is above our fair value P/E of 16.5, meaning the stock is somewhat overvalued right now.
We note that Parker-Hannifin has traded with significantly varying price-to-earnings multiples in the past decade, as earnings have moved higher or lower.
Still, over the next five years, we expect the current valuation to produce a -2.7% annual headwind to total returns.
Parker-Hannifin’s dividend history is obviously very impressive, and that has been made possible by the company’s outstanding free cash flow generation over time.
Even when the global economy was extremely challenged, Parker-Hannifin posted strong cash flow. This provides a huge margin of safety for the dividend, and we believe Parker-Hannifin’s payout is ultra-safe as a result.
If we assume long-term earnings growth of 10% and add in the current yield of 1.3%, Parker-Hannifin’s total return outlook is in the 8% to 9% range.
We continue to think Parker-Hannifin has a bright future in front of it, but the valuation has moved meaningfully higher in the recent past.
Therefore, expected returns are not quite high enough to warrant a buy recommendation, as the recent run-up in the share price has pushed the valuation level beyond fair value.
Parker-Hannifin is not a high dividend stock, and it almost certainly never will be. But its dividend track record is impressive, and it appears that it will continue for decades to come.
It uses its prodigious free cash flow to reward investors via a decent yield that grows over time, but also through growing by acquisitions and investing in its business.
The stock looks a bit overvalued today, which has reduced the total return outlook.
Given this, we rate Parker-Hannifin a hold, but if it were to trade closer to fair value, we’d upgrade to buy due to the company’s outstanding track record of growth and dividends.