Squeaky door? Old bike chain? Rusty hinge? Use some WD-40 and these common problems will be an easy fix. Most Americans have used this product for common issues around the house like the above. The WD-40 Company (NASDAQ:WDFC) is the parent company of the renowned and useful lubricant and rust removal product. But the namesake brand is not the company’s sole product. WD-40 Co. also owns well-known household and cleaning brands Spot Shot, 2000 Flushes, X-14, 1001, and more. Thus the company operates in two segments of maintenance products and household/cleaning products.
Source: WD-40 Co. Investor Presentation
With a portfolio of strong brands that many consumers use regularly, the WD-40 Co. has created a business model that has performed consistently and reliably. Mature, strong branded companies often produce steady earnings, cash flows, and dividends for investors. With such a categorization, WD-40 Co. is a prime target for dividend investors, but the question is if the company offers a compelling valuation to support investment. Many well-known dividend investments tend to get bid up to unreasonable valuations over time as people covet the reliable fixed income in their portfolio. This article will explore the past financial performance, current financial standing, forecasted growth, and the effect these factors would have on the dividend to gauge the stock.
A Decade Of Steady Financial Performance
Source: SEC 10-Ks
WD-40 Co. has seen slow but steady revenue growth. The CAGR for the past decade has been just 1.95% per year. As can be seen above, the major contributor to total revenue is the maintenance segment, which holds the WD-40 Multi-Use products. This segment also consists of WD-40 Specialist products, but 83% of the company’s revenue comes from the namesake product line. The most notable thing for a dividend investor to take away from the above is that demand for the core product is very evident and is likely to be into the future.
Source: SEC 10-Ks
When looking to invest in a company for the dividend income, I believe it is important to look at the company’s margins. If margins have been steady or better yet increased over time, the likelihood of increased dividend payments over the long term is high. Looking at the graph above shows that WD-40 Co. has been able to grow margins over the last decade. The gross margin has increased by 7% while operating and net margins have increased by 2.8% and 4.1%, respectively. A big takeaway from these increased margins is that much of this expansion has been from cost reduction instead of price increases.Source: WD-40 Co. Investor Presentation
While the past financials look good, looking to the future may hold an even better picture for growth prospects. WD-40 Co. aspires to grow revenue to around $700 million. The company plans on doing this by growing the WD-40 Multi-Use product line to $530 million and the WD-40 Specialist product line to $100 million. The company states that it targets a growth rate of around 6-9% per year to achieve this. This would factor out to a plan of 6-10 years to achieve this growth target. But with a past revenue growth rate of just 1.95%, is this possible? I believe that this is entirely achievable for WD-40 Co. to do. The company plans on growing by expanding the product lines abroad, and WD-40 Co. maintenance products have seen growth rates over the past 10 years of 5.8% and 6.9% from EMEA and Asia Pacific, respectively. On top of this, the company wants to maintain a 55% gross margin, a 30% cost of doing business margin, and a 25% EBITDA margin, which should help maintain expenses. Overall, for the next decade, I would expect a higher rate of growth at WD-40 Co., which will help the business grow the dividend over time.
Balance Sheet Stability
WD-40 Co. also has a very healthy balance sheet with high liquidity and low leverage. As of the most recent quarter, the current and quick ratios were 3.08x and 2.39x. This shows that the company can easily pay off any current debts and remain solvent. WD-40 Co. also is only leveraged at 1.26x debt-to-equity and had a times interest earned ratio of 31.7x. Taking this all together, the company has a solid foundation to remain solvent and produce long-term earnings.
As of writing, the price per share of WD-40 Co. is around $262. Using the 10-year average EPS of $3.32, the P/E is massive 78.9x. Just using 2020 EPS of $4.40, the P/E is still 59.5x. Using an EPS growth rate of 6.4% (this is derived from the growth aspirations above over 10 years at constant margins and a 100,000 share yearly buyback), the PEG is 9.3x using the lower of the two P/E ratios.
But the company has paid out a dividend for 40 consecutive years, and with the growth aspirations, the dividend should grow. At the current price, the company only offers a 1.02% dividend yield, and even if the company’s growth targets were met today, I calculate the dividend yield would still only be 1.56% (EPS of $8.18 at a 50% target payout). WD-4 Co. wants to target a 50% payout ratio, so to grow the dividend the company has to do so through the channels described previously, as the company has exceeded this 50% payout ratio over the last two years. With everything taken together, I do not see WD-40 Co. as a fairly valued company.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.