HB Fuller Co (FUL): A Small Cap Stock With Big Long-term Dividend Growth Potential

Turning to the balance sheet, we can see that H.B. Fuller has taken on a meaningful amount of debt to finance its past acquisitions and capital spending. The company has $119 million in cash compared to $692 million of debt, and it would take about 3.4 years’ worth of earnings before interest and taxes (EBIT) along with cash on hand to retire the debt.

H.B. Fuller’s reliable free cash flow generation and improving earnings profile cause us not to lose much sleep over the balance sheet, and we also take comfort in knowing that the company has a $300 million unused line of credit good through October 2019. H.B. Fuller seems well-financed to get through almost any unexpectedly volatile economic period ahead.

Source: Simply Safe Dividends

H.B. Fuller’s strong Dividend Safety rating starts with the company’s low payout ratios and consistent free cash flow generation in almost any economic environment. While the balance sheet has a little more debt than we would like to see, it’s hard to imagine a scenario that forces the company to ever reduce its dividend.

Dividend Growth Score

Our Growth Score answers the question, “How fast is the dividend likely to grow?” It considers many of the same fundamental factors as the Safety Score but places more weight on growth-centric metrics like sales and earnings growth and payout ratios. Scores of 50 are average, 75 or higher is very good, and 25 or lower is considered weak.

H.B. Fuller’s Dividend Growth Score of 81 suggests that the company stronger dividend growth potential than 81% of the dividend-paying stocks in the market.

While H.B. Fuller is too small to join the dividend aristocrats list, it is just four years away from achieving dividend king status. The company has raised its dividend for 46 consecutive years and compounded its payout at a double-digit rate over the last five years (see below).

Source: Simply Safe Dividends

Management looks to keep the company’s dividend payout ratio at 20-25% of average trailing three year’s net income, which is close to where the company sits today. As a result, we expect dividend growth to follow earnings growth over the next few years and remain between 8-12%.

Importantly, as seen below, H.B. Fuller is poised to generate significantly more free cash flow over the next five years than it did over the prior five years. The company is largely finished making large investments in its property, plants, equipment, and supply chain and will begin to harvest the fruits of its labor as expenses and capital spending normalize. This will result in substantial cash flow that can be used for acquisitions and returned to shareholders.

Source: H.B. Fuller Investor Presentation