Buying dividend-paying stocks at a discount is at the heart of my investment plan. It is crucial, to identify great companies. But it's equally important to buy ownership shares in those companies at the right valuation. Buying at an attractive valuation not only gets you more "bang for your buck", but also protects from downside. In my latest research, I came across an undervalued dividend growth stock (APOG) that I will be sharing with You today.
The company in focus today is Apogee Enterprises(APOG).
Business Analysis
Apogee Enterprises manufactures supplies used in construction. It specialises in architectural glass, aluminium framing and installation services to enclose buildings.
Basically, it provides what you see on the outside of many high-end buildings. Below are some examples of the projects that Apogee has been trusted with.
The company operates in 4 main business segments.
Architectural Framing Systems, Architectural Glass, Architectural Services and Large Scale Optical
On the graph below, you can see how the company has managed to grow its revenues across the 4 segments.
Apogee Enterprises Dividend
Cyclical companies usually don't make for great dividend payers. That's due to their sensitivity to the health of the overall economy. For example, Apogee needs the construction sector to be doing well in order for them to get more business. In times of economic distress, projects dry up.
That makes it even more impressive, that Apogee hasn't cut the dividend payout for 35 years.
The current dividend growth streak stands at 8 years.
For investors that bought 20 years ago, their yield on cost is over 20%. That is the power of dividend growth investing.
In times of economic distress, Apogee has maintained the dividend without raising it. In the last 20 years, the dividend has been kept steady during recessions. It is an impressive feat for a cyclical company to maintain the dividend in tough economic periods.
Over the last 20 years the dividend has grown at a CAGR pace of 6.5%.
I ran the current yield of 3.25% and the historical growth rate of 6.5% through my Dividend Growth Calculator. This helps me to see how much income I could estimate to receive in the future from a $10,000 investment.
Through dividend growth and re-investing, APOG has the potential to provide a 7.5% yield on cost in 10 years.
Dividend Safety
There is a reason Apogee has been able to pay its dividend in all economic conditions. The payout ratios are kept conservative in good times, to be able to maintain it during challenging times.
Trailing twelve months free cash flow payout ratio is 21%. As it's a backward-looking figure, it doesn't factor in the uncertainty of the current situation.
Looking at the free cash flow generation in Q1, Apogee FCF annualised payout ratio is 32%. A very conservative figure.
On forward estimated earnings basis, the dividend is covered with a 40.5% FWD earnings payout ratio.
Balance Sheet
Apogee Enterprises has a fortress balance sheet that ticks all the boxes for my criteria.
Debt/Equity currently stands at 0.49, just below my criteria of max 0.5.
Debt/EBITDA ratio is a very conservative 1.77. This means that APOG can pay off all its debt with 1.77 years worth of EBITDA.
Interest coverage is at 11x, meaning the company can cover its yearly interest payments 11 over from yearly EBIT.
Valuation
At the time of writing, the company's stock is trading at a very attractive valuation metrics.
As long-time followers of this website know, I use 3 ratios for valuation.
P/E, P/FCF and CAPE ratio.
Apogee Enterprises is undervalued according to all 3 ratios.
P/E is 12, P/FCF stands at 7 and CAPE ratio is 14.
For a company with a safely covered dividend and strong FCF generation, these 3 ratios suggest its very attractive valued.
Risks
Apogee Enterprises is a cyclical company that relies on the health of the overall economy. Whilst the economy seems to be recovering now, another wave of lockdowns would affect APOG's business.
However, the strength of the balance sheet should see the company through the current crises. It's a testament to the management that they have managed to keep the leverage low and the dividend well-covered.
Apogee also has very thin margins as the construction business is extremely competitive with no "moats".
Out of the 3 profitability metrics that I use (ROE,ROIC, FCF/Sales), APOG only passes the test on ROE(12%).
ROIC(9%) and FCF/Sales(4%) both fall short of my minimum criteria.
Summary
Apogee Enteprises has a strong track record of dividend growth, a conservative balance sheet and is trading at an attractive valuation. Although it's a highly cyclical company with thin profit margins, I believe it to be an interesting pick for income investors comfortable with volatility. Investors looking for growing dividend income should look into it, to see if it fits their personal investment goals, risk tolerance and criteria.
Apogee Enterprises(APOG) scores 11 out of 13 on my investment criteria checklist.
| My Criteria | Apogee Enterprises | Pass | |
| Dividend Yield | >2% | 3.25% | Yes |
| Dividend Growth 5-yr CAGR | >5% | 12% | Yes |
| FCF Payout Ratio | <60% | 32% | Yes |
| Dividend Growth Streak | >5 yrs | 8yrs | Yes |
| ROE | >12% | 12% | Yes |
| ROIC | >12% | 9% | No |
| FCF/Sales | >5% | 4% | No |
| Debt/Equity | <0.5 | 0.49 | Yes |
| Debt/EBITDA | <3 | 1.77 | Yes |
| Interest Coverage | >8x | 11x | Yes |
| P/E | <15 | 12 | Yes |
| P/FCF | <15 | 7 | Yes |
| CAPE | <20 | 14 | Yes |
Disclaimer: I may hold positions in companies mentioned in this article. This is NOT a recommendation to buy or sell any shares. You can lose a part of or all your invested capital.I am not responsible for the accuracy of any of the figures presented in the article. I am not a financial professional of any kind. Any stock transactions or analysis published should NOT be considered to be investing recommendations. Before making any investing or financial decisions, contact an appropriate professional.This website should be viewed for entertainment purposes only.
