Dividend Farming Scorecard: NACCO Industries (NC)

Earlier this month I summarized Top 10 Dividend Champions that ranked among the ten best in multiple investment metrics.  NACCO Industries was among the Top 10 firms in three different categories: Price-to-Earnings, Price-to-Book, and low Payout Ratio.  I thought it would be a good exercise to see how NC performed across the board.

The table below provides a summary of factors I consider as applied to NACCO Industries on March 17, 2019.  Laying out my analysis like this helps me quickly benchmark against my target metrics and compare this firm to alternatives.

FACTOR	METRICS	COMPANY
CCC List	Champion	Champion
Current Yield	4.0%	1.8%
Company Profile	Red Flags?	Primarily coal mining and related services
Industry Leadership	Top 10	7th
Market Cap	$10 B+	$267 M
P/E	< 20	7.6
P/B	< 2	1.05
Debt / Equity	< 1	.33%
Dividend History (Years)	25	33
12 Month Price Range	Lower Half	Top 20%
Dividend Payout Ratio	< 75%	13.2%
Portfolio Weight	Slightly Over	Under

CCC List: The DRIPinvesting.org web site provides the list of Champions, Contenders, and Challengers which is where I normally start.  NACCO industries has a substantial record as a Dividend Champion which bodes well out of the gate. 

Current Yield:  NC’s yield is 1.8%, less than half my target, paying $0.66 annually.

Company Profile:  NACCO is a mining company specializing in production of bituminous and lignite coal for power generation.  Power generation requirements won’t disappear in the foreseeable future.  However, I’m not as sure about fossil fuels that supply it e.g., coal.  While barriers to entry are high for competitors, I’m not sure the future for coal producers is sunny.

Industry Leadership:  The U.S. Energy Information Administration lists NACCO as the 7^th largest coal producer in the U.S.  That’s a nice stat but it must be paired with market capitalization and other factors to gain a clear picture.

Market Capitalization:  With a grand total of $267 million, the market cap for NACCO falls far below the desired minimum.  The size of the firm makes a number 7 ranking within the industry dubious.

Price to Earnings:  The trailing P/E of 7.6 is among the best I’ve seen in several months. Daily volumes are light and the firm small which may explain as much about the low P/E as would the firm’s business operations.

Price to Book:  P/B at $1.05 for every $1.00 purchased.  There’s no good will on the books and little in the way of intangible assets.  If the firm was liquidated, I would get back most of my money in which case the risk appears low.

Debt to Equity:  Debt is roughly a third of all assets owned so that’s a definite plus.

Dividend History:  A dividend growth history spanning 33 years is sound.  Better yet, the dividend growth rate over the past 10 years has been in the solid double-digit range.

Price Range:  The price is within 20% of its high during the trailing 12-month period.  I wouldn’t call it a bargain based on the range alone, but its volatility is such that it may be possible to buy into a position on a future dip.

Payout Ratio:  The payout ratio at just over 13% is about as low as a dividend payer may get.  There is plenty of room to run up that ratio and it appears NACCO has been working on doing that over the past 1 to 3 years.  However, the cash flow appears cyclical in which case I wonder how long an aggressive div growth practice may continue.

Portfolio Distribution:  NC would be my only coal producer if I were to add it to the farm. Energy is a great sector, but I question whether coal production is the best play.

Analysis  

NC misses on only 3 of my primary benchmarks.  At first blush, the opportunity looks sound, particularly considering the important financial ratios.  However, the size of the firm, health of the industry, and political climate in vogue leads me to believe NC wouldn’t be as sound a long-term investment as downstream energy plays in the sectors of generation or distribution.  Given the number of substitute fuels available for electricity generation, parking cash in a coal producer for the next 10 to 15 years isn’t a fit for this Dividend Farmer.   

The thoughts and opinions expressed here are those of the author, who is not a financial professional.  Opinions expressed here should not be considered investment advice.  They are presented for discussion and entertainment purposes only.  For specific investment advice or assistance, please contact a registered investment advisor, licensed broker, or other financial professional.