Why it’s a future dividend king to buy now

Simpson Manufacturing Co. NYSE:SSD sent its stock price reeling when it flagged its struggles during the first quarter of 2024, but now is a great time to buy these construction stocks. You don’t buy Simpson for today’s results, or even next quarter’s or next year’s results, but for the long-term outlook. This company is a budding Dividend King, on track to sustain solid dividend growth for several decades.

Sustained dividend growth is important because a growing payout helps offset deteriorating inflation, while compounding investment returns and building shareholder value in other ways. Sustained increases in distribution attract buy-and-hold investors, reduce volatility and help support above-average valuations.

Stocks like Cintas Corp. NASDAQ:CTAS I’m a great example. That company’s stock has risen by four digits as the business has grown steadily and leveraged that growth into sustainable distribution. The company has grown for nine consecutive years, with the tenth increase expected this summer.

Dividend yield

0.63%

Annual dividend

$1.08

Track record of increasing dividends

3 years

Annualized three-year dividend growth

4.83%

Dividend payout ratio

13.53%

Recent dividend payments

25 April

See full details

While Simpson’s dividend isn’t attractive at face value, it’s the internal metrics that make it shine. The 0.65% yield is lower than the industry and S&P 500 average, but much safer and more reliable. The company’s balance sheet is a fortress with cash flows that support internal growth financing, liquidity creation compared to last year and very low leverage ratios: the long-term debt-to-equity ratio is around 0.25x while the debt-to-cash ratio is approximately 1.25x. The bottom line is that the 12% payout ratio leaves ample room in the books to support 5% CAGR and earnings growth is expected. 2024 will be a challenging year, but will lead to a real estate recovery in 2025.

Simpson Manufacturing Sector Has a Difficult Quarter; Margin Growth Guides

Simpson Manufacturing went through a difficult period in the first quarter, due to weaknesses throughout the company. The company posted net revenue of $530.58 million, a decline of 0.7% that missed analysts’ consensus by 260 basis points. North America and APAC saw tepid growth of less than 0.5%, offset by more significant European weakness. Sales in Europe fell 3.4% due to lower volumes, which would have been worse without favorable currency conversion. In North America, volumes grew 8%, but were offset by pricing and timing of discounts.

Margin was also an issue in the first quarter. Gross margin contracted 120 basis points due to rising costs compounded by increased spending. Operating income fell 18.6%, net income 14.5% and GAAP earnings 13.5% to $1.77. The $1.77 is 15 cents lower than consensus, but sufficient to support operating quality and the outlook for capital returns. Capital returns include share repurchases to counter dilution that reduced the share count by an average of 0.45% in the first quarter.

The guidance is not specific regarding revenue and earnings, but presents a favorable outlook for margin. The company expects full-year margin to increase from 18.1% to 20%-21.5% for a gain of 240 basis points at the top end.

Simpson production returns to more sustainable levels

SSD

Simpsons production

$170.80

+1.18 (+0.70%)

(As of 04/25/2024 ET)

52 week interval

$117.08

▼

$218.38

Dividend yield

0.63%

P/E ratio

9.40pm

Price target

$195.00

Among the issues facing Simpson’s share price today is valuation. The stock trades at 22x this year’s forecast and 18x next year’s forecast following its implosion, suggesting it may be difficult to achieve higher prices soon. However, at 18 times next year’s earnings, there is an opportunity for price multiple expansion as the company returns to growth. Analysts are optimistic about the stock, which is now up 15% versus consensus. The consensus may change in the coming weeks, but a reversal in sentiment is not expected.

Price action in the SSD fell sharply following the report, and fell again the next day, but there are signs of solid support. The initial sell-off found support at a critical level and led to historically high volumes. The volume spike and support signals suggest market capitulation and could signal a bottom. If that happens, SSD stock will move sideways at this level until the end of the year. Otherwise, the SSD could break below the critical support, in which case it could fall to the $120 level.

Before you consider Simpson Manufacturing, you’ll want to hear this.

MarketBeat tracks daily Wall Street’s highest-rated and best-performing research analysts and the stocks they recommend to their clients. MarketBeat identified the five stocks that top analysts are quietly whispering to their clients to buy now before the broader market takes hold… and Simpson Manufacturing wasn’t on the list.

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