A Tale Of Two Hardware Stocks

Fastenal Company ($FAST)

Fastenal Company manufactures and distributes screws, threaded rods, and nuts. The firm operates retail stores in every U.S. state, every Canadian province, and over a dozen states in Mexico.

The business was founded in 1967. And, Fastenal began paying dividends in 1991.

The company has consistently beaten the market, delivering a 10-year average annual total return of 17.56%. However, Fastenal trades at a high price to earnings ratio of 37.83. This is tech stock levels of valuation for a company that sells nuts and bolts.

On top of this, Fastenal Company does have a 5-year compound annual dividend growth rate of 11.91%. But, there are several years, including 2024, where Fastenal eked out a paltry 2 - 3% dividend raise. On the flip side, Fastenal occasionally pays special dividends, most recently in 2020 and 2023, and most years do see the company hiking their payouts by 10% or more.

• Forward PE ratio of 37.83

• 2.13% starting dividend yield

• 5-year dividend CAGR of 11.91%

• Payout ratio of 79.60%

• 10-year stock performance 17.56%

There are several high-quality companies that trade at premium valuations. And most of these businesses have starting dividend yields of 1% of less.

Fastenal Company is expensive. But, the stock has a starting yield of 2.13%. And between the firm’s market-beating performance, decently high starting dividend yield, and frequent double digit dividend growth, I think this is a good business albeit a pricey one.

Snap-on Incorporated ($SNA)

Fastenal makes the nuts and bolts, Snap-on Incorporated makes the tools to tighten them. Founded in 1920, Snap-on Incorporated makes ratchets, drills, vehicle diagnostics equipment, and storage containers.

Snap-on products are used by everyone from homeowners to professional mechanics to the United States military.

The company has paid dividends since 1938. And while Snap-on Incorporated has lagged the S&P 500 in recent years, with a 10-year average annual total return of just 9.13%, the company has consistently grown its dividend at a rapid rate while still maintaining a relatively low payout ratio.

Snap-on Incorporated has a 5-year compound annual dividend growth rate of 14.59%, a payout ratio of just 42.24%, and a price to earnings ratio of 16.54.

• Forward PE ratio of 16.54

• 2.78% starting dividend yield

• 5-year dividend CAGR of 14.59%

• Payout ratio of 42.24%

• 10-year stock performance 9.13%

This company is a lot less expensive than Fastenal while also offering a higher starting yield and better dividend growth. However, Snap-on does lag the general market.

That said, a 2.78% starting yield and even 10% annualized dividend growth would create some monster yield on cost metrics for long-term, buy-and-hold income investors. A 10% dividend hike this November, when Snap-on typically raises its dividend, would give investors who bought the stock at today’s price a 3% yield on cost.

And according to the “Rule of 72,” it would only take Snap-on investors 4.93 years to double their yield on cost - if the company continues to raise its dividend by an average of 14.59% per year.