In early December, Barron’s published an article about a little-known Ohio-based company that had grown its annual dividend for 50 consecutive years. It got me thinking about mid-cap stocks with robust dividends.
The featured company above is RPM International (NYSE:RPM), with great brands such as Tremco, Rust-Oleum, DAP, Varathane, and Tremclad. They are a paint and coating manufacturing company, so many do-it-yourselfers of home repair and renovations are familiar with RPM.
RPM is a holding of ProShares S&P MidCap 400 Dividend Aristocrats ETF (BATS:REGL), a collection of 46 mid-cap stocks that have increased their annual dividend for at least 15 years.
The traditional definition of a mid-cap is those companies with market capitalizations of $2 billion to $10 billion. While REGL’s weighted average market cap is $6.9 billion, many of the ETF’s stocks have market caps over $10 billion.
Today, three selections encompass any market cap, regardless of whether they fit within the range. More importantly, the following three have strong business models and consistently grow dividends.
Williams-Sonoma (WSM)
Without question, Williams-Sonoma (NYSE:WSM) is one of my favorite companies in the S&P 500. Run by CEO Laura Alber since 2010, she has a history of leadership at WSM since 1995.
Over the past five years, WSM stock has appreciated by 271%, more than three times the index. Part of its success is due to Alber’s outstanding leadership. However, it also has much to do with the specialty retailer’s business model.
For most of Alber’s tenure, Williams-Sonoma has had an omnichannel business model with online sales virtually identical to its brick-and-mortar revenue. As far back as September 2012, I was recommending its stock mainly due to the equal division of sales.
“[The] major reason for my excitement is Williams-Sonoma’s direct-to-customer business, which delivers much higher operating margins and represents 47% of its overall revenue, up from 45% year-over-year. Some experts suggest online revenues could account for as much as 50% of the retail industry’s overall business within 20 years,” I wrote in 2012.
In 2022, e-commerce accounted for 66% of its $8.7 billion in annual revenue. Thanks to the margins from its online sales, its return on invested capital was impressively high at 49.4%.
Despite a slowdown in its business, it continues to generate net margins above 10%, which is outstanding. This is one of those stocks you buy a little now and then add to your position whenever it trades closer to $150, instead of its current price of $199.35. So, be on the lookout.
Lincoln Electric (LECO)
Lincoln Electric (NASDAQ:LECO) hasn’t done quite as well as WSM over the past five years, up 157%. However, it has doubled the index’s return over the same period.
It’s been a while since I last talked about the welding company, when I recommended it in May 2023. It generates excellent returns on invested capital with healthy revenue growth.
In Q3 2023, its sales increased 10.5% to a record $1.03 billion, with a record adjusted operating margin of 17.7% ($171.4 million). Its net income increased by 18.4% to $129.3 million, a net margin of 12.5%, 80 basis points higher than a year earlier.
Most importantly, its adjusted ROIC in the third quarter was 23.6%. Its total debt was $1.11 billion, just 9.2% of its market cap.
In December, the company launched Velion, a line of DC fast EV chargers that leverage its welding equipment know-how to deliver a quality product to American EV owners and businesses using EVs.
“Our DCFC charger is also the first and only American designed and American made EV charger to not only meet, but exceed, the requirements of the federal government’s National Electric Vehicle Infrastructure Formula Program,” stated Steven Sumner, Lincoln Electric’s head of innovation.
The company could have a winning product on its hands. I like its chutzpah.
Polaris (PII)
Polaris (NASDAQ:PII) stock is down nearly 14% over the past year. The maker of ATVs, SSVs, motorcycles, and snowmobiles is facing sluggish sales due to higher interest rates, which have cut down on big-ticket discretionary spending.
Despite the cyclical nature of its business, the company has increased its annual dividend for 28 consecutive years and has made money every year since going public in 1987. Currently, it yields a reasonable 2.9%.
In addition to its dividend payments, it took the opportunity in 2023 to repurchase $286 million of its stock over the past 12 months, buying back more than 5% of its stock over the past year. It had $204 million left on its share repurchase program as of Sept. 30, 2023.
As for the year ahead, S&P Global Ratings provided a research update for the company this past November.
“For 2024, amid an increasingly weaker retail outlook, we expect revenue to be flat to up modestly, with any growth driven by new vehicle releases and relatively stable utility demand in the off-road vehicle segment,” stated S&P Global Ratings. “We expect good operating cash flow generation as working capital requirements for inventory abate as supply chain lead times continue to ease in 2023.”
Of the 17 analysts covering PII stock, four rate it overweight or an outright buy, with 12 hold and one sell. The target price is $98, 11% higher than it’s current trading spot. Also, its shares are trading at 8.4x the 2024 EPS estimate of $10.43.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
