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The Dividend Aristocrats consist of S&P 500 companies that have raised their dividends for at least 25 years in a row. Each year, the list changes as new companies are added (and occasionally are removed when streaks end).Fastenal Co. (FAST) was the one addition to the Dividend Aristocrats list in 2024.Fastenal increased its dividend last year for the 25th consecutive year. On January 17th, 2024, Fastenal raised its quarterly dividend by 11%, from $0.35 to $0.39.This article will discuss the most recent addition to the Dividend Aristocrats list in greater detail.

Business Overview
Fastenal began in 1967 when Bob Kierlin and four friends pooled together $30,000 to open the first store. The original intent was to dispense nuts and bolts via vending machines, but that idea got off the ground after 20 years.The company went public in 1987 and today provides fasteners, tools, and supplies to its customers via 1,592 public branches, 1,872 active Onsite locations, and over 115,000 managed inventory devices.Fastenal has a market capitalization of $38 billion.In mid-April, Fastenal reported (4/11/24) financial results for the first quarter of fiscal 2024. It grew its net sales 2% over the prior year’s quarter thanks to growth in Onsite locations, mostly those that opened in the last two years. Source: Investor PresentationSales were lackluster, as they were hurt by adverse weather but this is a non-recurring issue. Earnings-per-share remained flat at $0.52, missing the analysts’ consensus by $0.01. It was the first earnings miss after 17 quarters in a row.Fastenal posted record earnings-per-share in 2022 and 2023 and is likely to post another record this year, given its positive momentum and its guidance for 375-400 new Onsite locations in 2024, more than the 326 new Onsite locations achieved in 2023.

Growth Prospects
Fastenal has grown its earnings-per-share at a 10.2% average annual rate over the last decade and at a 9.0% average annual rate over the last five years. This has been driven by a variety of factors, including sales more than doubling, an improvement in margins, and tax reform.The COVID-19 pandemic impacted many businesses, but Fastenal proved resilient in 2020. The traditional business faced challenges, but the Safety segment more than offset lost sales. We expect 7% growth of earnings-per-share over the next five years.Fastenal is in the midst of a transformation from the traditional public branches leading the business to Onsite locations and managed inventory (mostly vending devices) heading the growth story.We believe this is a prudent move, establishing stickier relationships with customers. This is especially true since only a small fraction of the company’s business is from walk-in customers while the majority is done business-to-business.

Competitive Advantages & Recession Performance
Fastenal has a first-mover competitive advantage in its industrial vending and Onsite locations, creating a very sticky and well-attuned customer relationship with high switching costs.Moreover, its scale allows the company to continue its growth path, adjust to business preferences and reliably deliver needed goods.You can see Fastenal’s earnings-per-share during the Great Recession below:

Earnings declined during the worst of the recession, but the company remained profitable. This kept the dividend rising during that period.While we note some cyclical possibilities in the construction industry, thus far the company has proven itself to be well-prepared to endure financial storms.We note that the dividend payout ratio is elevated at 73% for 2024, but we believe this is reasonable considering the debt-free balance sheet.

Valuation & Expected Returns
Based on expected adjusted EPS of $2.15 for fiscal 2024, Fastenal stock is currently trading at 30.7 times its expected EPS. The earnings multiple is above our estimate of fair value at 24 times earnings.This implies a 4.8% annual headwind should it reach 19 times earnings over the next five years. The decline will be offset by the expected earnings growth, which we estimate at 7% per year.Fastenal stock also has a current dividend yield of 2.3% per year. Therefore, we project total annual returns of 4.5% over the next five years.

Final Thoughts
Fastenal has proven a great company, with consistent growth of earnings and dividends. Moreover, it is executing moves to better cement itself as a go-to supplier.However, the stock has more than doubled in the past five years and has become overvalued. We expect the stock to generate a 4.5% average annual total return over the next five years. The stock maintains its hold rating.More By This Author:3 High Yield REITs With Safe Dividends
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