Tuesday, August 26, 2014

Fourth Pick in the WMD Portfolio - Raven Industries

The more real they are, the more fun blogs are to follow. So in that spirit, rather than talking about ideas in the abstract I maintain a hypothetical portfolio to track ideas where I'll semi-regularly (and hypothetically) invest and track buying (and where required selling) shares.

For tracking purposes I will use $1,000 to keep it nice and simple. The overall goal is long run income and dividend growth. Portfolio page with goals and tracking is here.

The current portfolio consists of Coca Cola, GlaxoSmithKline and IBM. Stalwarts all. Raven is a bit different than the rest, for one thing its a small cap with a $987M market cap, but its earned its place all the same. Raven has three main divisions: Applied Technology, Engineered Films & Aerostar Division and they serve industrial, agriculture and defense customers.

On the quantitative side, Raven has a low yield (1.8%) relative to the S&P, though that is a little bit more attractive if you compare Raven's yield of the Russell 2000 index which yields 1.3%.  Raven has some positives, for starters Raven is a Dividend Champion. They've paid dividends 27 consecutive years. On top of that,  Raven has committed to growing their dividend, they have a ten year annualized dividend growth rate of 15.5%.

Does Raven have a moat? Todd Wenning covered Raven in his informative investigative series on Small Cap moats:

"This business has two potential moat sources. One is switching costs; once a farmer has installed a Raven precision ag system across a fleet of equipment and learned how to use the programs, there's an added cost of switching to a competitor's offering. The second source is network effects; a reputable, well-established company with a wide breadth of support, service, and training has an edge over any newcomer."

Small cap moats are different from the behemoth moats like IBM in mainframes, Glaxo in vaccines and Coca Cola, but there is a case to be made that Raven, through advanced manufacturing skill and long term focus, has carved a profitable niche for itself. The numbers bear this out

Payout ratio44%
Fwd Dividend Yield1.8%
10 yr Div Growth15.5%
ROE 5 yr avg26%
Forward P/E18
(Source: Morningstar)

Raven is a manufacturer with a great track record and yet has no debt, this provides a margin of safety. If Raven can continue to come close to its long run ROE and dividend growth averages this should be a good investment over the 5-10 year timeframe. The shares are not super cheap but the company is very innovative (even providing tech (balloons) to Google for Project Loon). Its a shareholder friendly company and at today's prices, Raven is right about at its 52 week low.  Put it all together and it looks like a fair price for a high quality company with a years of dividend growth ahead of it.

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