Is Ritchie Bros. the Perfect Contrarian (Dividend) Stock?
Shares of the world’s largest auctioneer of industrial equipment are getting clobbered today, down 12.5% at one point to a new 52-week low.
The cause? The company reported worse-than-expected sales and earnings for the second quarter.
After digging into the results, though, I think we’re witnessing a knee-jerk overreaction by investors.
Going Beyond the Headlines
I’ll concede the headlines scream caution…
Ritchie Bros. missed earnings estimates by 17% or $0.06 per share and sales estimates by 8% or about $12 million.
Not to mention, CEO, Peter Blake, served up a grade-A negative sound bite when he complimented employees for their hard work “in the face of a challenging used equipment supply market.”
But headlines can be misleading. And in this case, if we actually take the time to look past them, we quickly see that the company’s hardly struggling. To the contrary, it’s growing! And at a healthy clip.
In fact, over the last three months, sales and earnings were up 11% and 17%, respectively. Over the last six months, they were up 13% and 25%.
What’s more, management might be downbeat about the past quarter, but they’re certainly not about the future. As Blake said, “We remain confident in our ability to execute and achieve our 2012 plan.”
Now, in isolation, such a comment could be construed as lip service. But not when it’s accompanied by a 9% increase in the company’s dividend to $0.1225 per quarter or $0.49 per year.
Sorry folks. Companies that are struggling – or worried about the future – don’t raise their dividend all willy-nilly. Hardly. Increasing the dividend is a decision that requires confidence in the fact you’ll be able to pay the higher amount no matter happens in the world. And when it comes to Ritchie Bros., such confidence is well founded…
Recession Resistant? Yuuup!
As hard as it may be to believe, the resale market for industrial construction equipment is actually recession resistant. But you don’t have to just take my word for it.
Here’s what Blake said back in 2008: “We tend to grow faster in times that are more turbulent.”
How’s that possible? I’ll let Morningstar’s analyst explain it for you: “In prosperous times, contractors are more likely to sell their older equipment and buy new, and in bad times contractors save money by acquiring used equipment.”
Once again, encouraging words are backed up by concrete proof. Since 1998, through multiple economic slowdowns, Ritchie Bros. increased sales by an average of 12% per year. I’d say that qualifies as recession resistant, wouldn’t you?
Here are three more factors that make this a recession-proof stock worth your consideration…
- A wide moat. Ritchie Bros.’ gross auction proceeds exceed those of its 50 closest competitors, combined. Such size creates a network effect, effectively blocking out any new entrants.
- Minimal inventory risk. The company generates about 65% to 70% of revenue on a fixed commission arrangement, making its business very low risk. In those instances when it does bear inventory risk, it possesses an unfair advantage – a proprietary database of historical sales information that allows it to always price equipment to sell.
- Endless growth opportunities. Although Ritchie Bros. generated $3.7 billion in auction proceeds last year – and is a clear marketshare leader – the global market for used heavy equipment is much larger, at $100 billion. So there’s no reason the company can’t keep growing. Especially since it has 110 locations in more than 25 countries and an internet auction site with over 2.6 million unique visitors per month.
Bottom line: In the last 24 hours, the yield on Ritchie Bros.’ stock jumped a full half percentage point to 2.7%. And that should entice the contrarian dividend investor in you. Especially considering the facts that the dividend is safe – Ritchie Bros. sports a dividend payout ratio of just 61% – and the underlying business is growing.