Snap-on Inc. (SNA) is a leading global innovator, manufacturer and marketer of tools, equipment, diagnostics, repair information and systems solutions for professional users. Founded in 1920, Snap-on is an S&P 500 company headquartered in Kenosha, Wisconsin.
Snap-on’s Dividend Record
Snap-on’s dividend record is very good. While it has only been raising its dividend for 10 straight years, it has paid a dividend for more than 27 years. It froze its dividend in 2009 during the Great Recession and resumed increases the following year. Prior to that, SNA’s dividend rose and fell from year to year; in other words, it was a “dividend stock,’ but not a dividend-growth stock.
The dividend is not in danger, as indicated by Simply Safe Dividends awarding a safety score of 99 out of 100 points, which is the highest score available.
Overall, I would classify Snap-on as a mid-yield, fast-growth dividend growth stock. It is not realistic to believe that its very fast recent pace of increases is sustainable over a very long term, but it’s off to a great start.
(Graphic from Simply Safe Dividends)
Snap-on’s Business Model and Company Quality
Snap-on’s products and services include hand and power tools, tool storage, diagnostic software, information and management systems, shop equipment and other solutions for vehicle dealerships and repair centers. In addition to vehicle establishments, Snap-On sells to customers in aviation and aerospace, agriculture, construction, government and military, mining, natural resources, power generation and technical education.
The company began with the development of the original Snap-on interchangeable socket set in 1920.
It subsequently pioneered mobile tool distribution in the automotive repair market, where well stocked vans sell to professional vehicle technicians at their place of business.
Today, Snap-on defines its value proposition more broadly, extending its reach “beyond the garage” to deliver a broad array of unique solutions that make work easier for serious professionals performing critical tasks.
SNA’s growth strategy focuses on expanding its professional customer base in its legacy automotive market, as well as adding adjacent markets, additional geographies, and critical industries, where the cost and penalties for failure can be high.
Snap-on’s Financial Services segment includes franchisees’ customers, (principally vehicle repair technicians), SNA customers who require financing for the purchase or lease of tools and equipment, and franchisees who require financing for vehicle leases and business loans.
SNA gets an “A+” financial grade from Value Line, which is their second-highest grade. Let’s look at specific financial categories and see if we agree.
Return on Equity (ROE) is a standard measure of financial efficiency. ROE is the ratio of profits to shareholders’ equity.
The average ROE for all Dividend Champions, Challengers, and Contenders is about 15%, which is similar to the ROE for S&P 500 companies generally. The following chart shows SNA’s ROE for 2011-2019.
(Source of all yellow-bar charts: Simply Safe Dividends)
SNA’s ROE runs about a third above average.
Debt-to-Capital (D/C) ratio measures how much a company depends on borrowed money. Companies finance their operations through a mixture of debt, equity (new shares), and their own cash flows.
A typical D/C ratio for a large, healthy company is 50%, meaning equal dependence on debt and equity. Debt is an indicator of financial risk. All else equal, stocks with high D/C ratios are riskier than those with low D/C ratios.
Snap-on’s use of leverage is modest, running in the 25-30% range in recent years. The company carries an A- credit rating from S&P, which is a mid-level, investment-grade rating.
Operating margin measures profitability: What percentage of revenue is turned into profit after subtracting cost of goods sold and operating expenses?
Per recent research, typical operating margins for S&P 500 companies have been in the 11-12% range.
Snap-on’s operating margin runs well above average, in the low 20’s for the past several years.
Earnings per Share (EPS) is the company’s officially reported profits per share. We want to see if a company has had years when it officially lost money, or if its earnings are steadily increasing, declining, or flat.
Not only have SNA’s earnings all been positive in the last decade (ending in 2019), but it is one of the few companies that I have examined whose earnings have risen each year. Covid-19 will bring that streak to an end for 2020, with a 13% drop in earnings forecast for the full year (per FASTGraphs). Covid-19 aside, that is a terrific earnings record.
Free Cash Flow (FCF) is the money left over after a company pays its operating expenses and capital expenditures. Whereas EPS is subject to GAAP accounting rules, which shift money around (as does depreciation, for example), cash flow is a more direct measure of money flowing through the company on a real-time basis. FCF is the cash that a company has available for dividends, stock buybacks, and debt repayment.
Snap-on has been generating copious cash, generally rising throughout the past decade. That, of course, has helped it attain its fast dividend growth over the past few years and also accounts for the high dividend safety score from Simply Safe Dividends that we saw earlier.
Share Count Trend shows whether the company’s outstanding shares are increasing in number, decreasing, or remaining flat.
I like declining share counts, because the annual dividend pool is spread across fewer shares each year. By retiring its own shares, the company is investing in itself, expanding each remaining share into a larger piece of the pie, and improving all of the per-share statistics.
SNA’s share count has been basically flat for the past decade.
Here is a summary of the items above:
That is one of the best financial records that I have seen. The only reason I don’t grade it an “A” is the impact of Covid-19 on 2020 results (when they are finalized), combined with the flat share count.
I think Value Line has it right with its A+ grade on their scale, which is their second-best grade.
Snap-on’s Stock Valuation
My 4-model process for valuing companies is described in Dividend Growth Investing Lesson 11: Valuation. Let’s go through the steps.
Models 1 and 2: FASTGraphs relative P/Es
These two models compare the stock’s current price to (1) FASTGraphs’ basic estimate of its fair value, and (2) the stock’s own 5-year average valuation.
The orange line is Model #1, FASTGraph’s default valuation line based on a standard price-to-earnings ratio (P/E) of 15. The blue line is Model #2, based on SNA’s own average 5-year P/E, which is 17.2.
The black line is SNA’s actual price, and the right end of the line represents its current valuation, which is 16.5. Just from observation, we can tell that SNA’s valuation is a little above the Model 1 reference line and a little below Model 2’s reference line.
To put numbers on those observations, I compute valuation ratios, which are the ratios of the actual price to the fair price references. Here is the formula:
Valuation Ratio for FASTGraphs = Actual P/E divided by Reference P/E
Here are the valuation ratios for SNA.
- Model 1: Based on default (orange) line: 16.5 / 15 = 1.10
- Model 2: Based on historical (blue) line: 16.5 / 17.2 = 0.96
The first valuation ratio suggests a fair price of $179 / 1.10 = $163. The second valuation ratio suggests a fair price of $179 / 0.96 = $186.
Model 3: Morningstar Star Rating. Morningstar ignores P/E ratios. Instead, they use a discounted cash flow (DCF) method for valuation. Many investors consider DCF to be the best method of assessing stock valuations.
Morningstar creates a detailed projection of all the company’s future cash flows. Each year’s number is discounted back to the present to reflect the time value of money, then they are added up. The resulting net present value of all future cash flows is considered to be the fair price for the stock today. They update their estimates periodically.
Morningstar is transferring coverage of Snap-on to a new analyst, so their last calculated fair value was published in August. Based on that fair value, the graph below suggests that their valuation ratio was 1.04. That would suggest a fair price of $172.
Model 4: Current Yield vs. Historical Yield. Last, we compare the stock’s current yield to its historical yield. This approach is based on the idea that if a stock’s yield is higher than normal, it suggests that its price is undervalued (and vice-versa).
SNA’s current yield is 2.8% compared to its 5-year average of 2.1%. That gives us a valuation ratio of 0.75. However, for this model, I put a floor under the ratio at 0.80. The fair price then calculates as $179 / 0.80 = $224.
Beta measures a stock’s price volatility relative to the S&P 500. I like to own stocks with low volatility, because they are easier to live with.
SNA’s’s 5-year beta of 1.37 compared to the market as a whole (defined as 1.0) means that its price has moved quite a bit more than the market on average. This is a negative factor.
Thomson Reuters’ IBES database compiles Wall Street analysts’ current recommendations. This is their latest summary of 9 analysts covering Snap-on:
The average recommendation of “buy” is a positive factor.
What’s the Bottom Line on Snap-on?
Here are SNA’s positives:
- Very good dividend resume: Mid-yield at 2.8%; very fast dividend growth rate for its yield; and very safe dividend safety score of 99.
- Good business model and overall quality. Literally every one of the quality rating factors that I look at from Value Line, Morningstar, and S&P are “good.”
- Very good financials, including high efficiency, high profitability, strong earnings and cash flow, and low debt.
- Fairly valued.
And these are Snap-on’s negatives:
- Short dividend-growth streak (10 years).
- No share decline (although that means that they are funneling all excess cash to shareholders directly via dividends)
- More volatile than market.
This is not a recommendation to buy, hold, sell, trim, or add to SNA. Any investment requires your own due diligence. Always be sure to match your stock picks to your personal financial goals.
Other Reading on SNA
Shah Gilani, 5 Dividend Paying Stocks You Can Retire On (July 2020)
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This article first appeared on Dividends & Income
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