Parker-Hannifin Corp (PH): 59 Straight Dividend Increases and Plenty of Runway for Growth

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.

PH’s dividend Growth Score is 64, suggesting that the company’s dividend growth potential is above average. PH has increased its dividend for 59 consecutive years, firmly securing its spot on the exclusive Dividend Kings list, which contains stocks that have raised their dividend for at least 50 straight years. However, the company is surprisingly not a member of the S&P Dividend Aristocrats Index. We are not sure why S&P does not include PH, but we guess it could be that it measures increases on a calendar year basis instead of fiscal years (PH’s fiscal year ends in June). Regardless, PH’s dividend growth is consistent and impressive.

While PH’s 2.8% dividend yield is not enough income for investors living off dividends in retirement, its dividend has grown by 150% over the last five years and consistently compounded at a double-digit clip.

Source: Simply Safe Dividends

Going forward, PH targets an EPS payout ratio of 30%, which the company is at today. In other words, future dividend growth will correlate with earnings growth, which management hopes will hit 10% per year even if end markets remain sluggish.

Valuation

Parker-Hannifin Corp (NYSE:PH) trades at 15x forward earnings and offers a dividend yield of 2.8%, which is significantly higher than its five year average dividend yield of 1.7%. The earnings multiple appears to be very reasonable for a company of PH’s quality, likely reflecting the market’s pessimistic outlook for growth in many of PH’s end markets.

However, management believes the company can put up double-digit earnings growth even “if the industrial space for the next five years is a weed bed.” If true, the stock could generate double-digit annual returns over through 2020, barring a global recession.

Conclusion

No one knows exactly when industrial activity will begin to rebound. The headwinds caused by depressed natural resource markets, the strong dollar, and stagnant economic activity could persist for quite some time.

However, PH has the business model to survive any climate and emerge stronger on the other side. It is our expectation that the company will be larger and more profitable five years from now, and long-term dividend growth investors will be rewarded. PH remains one of our favorite blue chip dividend stocks that we are willing to stay patient with.

Disclosure: None