Polaris Industries:  The King of Off-Road Recreational Vehicles

This article is a guest post written by Ben Reynolds of Sure Dividend.  Sure Dividend focuses on high-quality dividend growth stocks suitable for long-term holding.

You may not have heard of Polaris Industries (PII)  – it does not get as much recognition as other dividend growth stocks like McDonald’s (MCD) or Apple (AAPL).  Still, Polaris Industries is the industry leader in off-road vehicles.  Investing in the top company in an industry can produce phenomenal returns.  Case-in-point:  over the last 10 years, Polaris Industries has compounded its earnings-per-share at 16.8% a year.  The company’s share price has increased nearly 400% in the same time period.

With rapid growth, one would expect Polaris Industries to be a relatively new company.  It is not, however.  Polaris Industries was founded in 1954.  The company has paid steady or increasing dividends since 1989, making Polaris Industries a potential candidate to consider when building a dividend growth portfolio.  Polaris Industries’ operations, growth prospects, and dividend are analyzed below.

Business Overview

Polaris Industries Operations are split into 5 segments.  Each segment is shown below along with the percentage of total revenue generated by the segment for Polaris Industries in fiscal 2014:

  • Off-Road Vehicles: 65% of revenue
  • Parts/Garments/Accessories: 17% of revenue
  • Motorcycles: 8% of revenue
  • Snowmobiles: 7% of revenue
  • Small Vehicles: 3% of revenue

The Off-Road Vehicles segment is by far the largest.  The segments sells off road vehicles under the Ranger, RZR, Sportsman, and Ace brands.  Polaris Industries surpassed its competitors to become the market share leader in off-road vehicles in 2010.  Since that time, the company has increased its market share lead every year thanks to its strong brands.

The company’s second largest segment is the Parts/Garments/Accessories segment (hereafter referred to as PG&A).  The PG&A segment generated 53% of revenue from accessories, 39% from parts, and 8% from apparel in fiscal 2014.  69% of total revenue came from off-road vehicle PG&A items.

The company’s other 3 segments accounted for 18% of total revenues in 2014, combined.  The motorcycles segments sells under the Victory, Indian Motorcycles, and Slingshot brands.  The Snowmobiles segment sells the following brands:  RMK, Indy, Rush Pro Ride, and Switchback.  The Small Vehicles segments sells under the GEM, Groupil Industries, Aixam, and Mega brands.

Growth Analysis

Polaris Industries has experienced phenomenal growth over the last 10 years.  The company’s 10 year growth rates over a variety of metrics are shown below:

  • Revenues-Per-Share Growth Rate: 1% per year
  • Earnings-Per-Share Growth Rate: 8% per year
  • Dividends-Per-Share Growth Rate: 7% per year
  • Book-Value-Per-Share Growth Rate: 7% per year

As you can see, Polaris Industries has compounded shareholder wealth at between 12.7% and 16.8% a year over the last decade, depending on what measure you use.  The company’s rapid growth has been driven by finding the ‘right people’, focusing on quality, and building its brands while increasing efficiency.  Over the last decade, profit margins have increased from 7.7% to 10.1% – a significant boost in profitability.

Polaris’ management is expecting 12% sales growth per year and 13% earning-per-share growth per year up to the year 2020.  If the management of most companies announced 13% earnings-per-share growth goals to 2020, investors would be wise to be skeptical.  With Polaris Industries – the opposite is true.  It is very likely the company hits its 13% earnings-per-share growth goals up to 2020.  The company greatly exceeded this level of growth in earnings-per-share over the last decade.  It would take a significant and protracted recession for the company to not grow earnings-per-share at a 13%+ a year going forward.

Polaris Industries will achieve its growth as it gains greater efficiencies through scale.  The company is opening up a new manufacturing plant in the U.S. in the second quarter of 2016.  Additionally, Polaris Industries is seeing strong demand for both in both its Motorcycles segment and its flagship Off-Road Vehicles segment.

Dividend Analysis & Valuation

Polaris Industries currently has a dividend yield of 1.5% and a payout ratio of just 28%.  With a low payout ratio and a high expected growth rate, dividend investors in Polaris Industries should expect dividend growth of at least 13% a year over the next several years, and quite possibly higher.  By 2020, current investors will have a yield on cost around 3% if the company grows its dividend payments at 13% a year.  It is quite possible the company will grow its dividend payments significantly faster.  If management decides to increase its payout ratio over the next several years, dividend investors will see even higher yields-on-cost.

Polaris Industries currently offers shareholders an expected total return of 14.5%.  This return comes from dividends (1.5%) and expected earnings-per-share growth (13%).  With a total return of 14.5%, Polaris industries investors can expect to double their initial investment in just over 5 years.

Somewhat surprisingly given its strong growth history, Polaris Industries does not trade at a nose-bleed price-to-earnings ratio.  The company currently has a price-to-earnings ratio of 21.4 and a forward price-to-earnings ratio of 16.3.  At current prices, Polaris Industries appears fairly valued – if not undervalued – considering the company’s excellent growth prospects.

Dividend Monk’s Note:

I decided to use the Dividend Discount Model to add more on valuation in this article.

Using the Dividend Discount Model with a dividend growth of 13% for the first 10 years  and then a smaller dividend growth rate of 9% and a discount rate of 11% (since the company is not comparable to a giant dividend payer such as MCD), we get the following chart:

Calculated Intrinsic Value OUTPUT 15-Cell Matrix
Discount Rate (Horizontal)
Margin of Safety 10.00% 11.00% 12.00%
20% Premium $392.50 $193.86 $127.75
10% Premium $359.79 $177.70 $117.10
Intrinsic Value $327.08 $161.55 $106.46
10% Discount $294.37 $145.39 $95.81
20% Discount $261.67 $129.24 $85.17

The Dividend Toolkit provides me with a two stage DDM calculation and clearly shows the stock trading at a 10% discount. I’ve doubled check my valuation with Morning Star and they value PII at $169. Therefore, my calculation are line with other analysts.

Final Thoughts

Polaris Industries has grown to become the leader in the North American off-road vehicle industry.  The company has experienced somewhat of a renaissance over the last decade – and especially the last 5 years.  Management has done a fantastic job of growing the business while simultaneously increasing margins and paying dividends.

In addition, Polaris Industries scores high marks for safety.  The company is a member of the Dividend Achievers Index; it has increased its dividends each year since 1992 and has paid steady or increasing dividends since 1989.  Polaris Industries has just under $230 million in debt on its books.  The company made $455 million in profits in 2014; Polaris Industries is conservatively financed.  In addition, the company has over $100 million in cash on hand.

Polaris Industries is a conservatively financed industry leader .  The company offers investors solid dividend growth potential with a current yield about 0.3 percentage points below the S&P 500’s current dividend yield.  Polaris Industries shares may be suitable for long-term dividend growth investors focused more on future income than current income.

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Walmart Stock Analysis – The Gentle Giant with Generous Dividends Trading at 10% Discount

Wal-Mart Stores Inc (WMT) operates retail stores in various formats under various banners. Its operations are comprised of three reportable business segments, Walmart U.S., Walmart International and Sam’s Club in three categories retail, wholesale and others.

-Seven Year Revenue Growth Rate: 4.82% stock report
-Seven Year EPS Growth Rate: 9.32%
-Seven Year Dividend Growth Rate: 16.23%
-Current Dividend Yield: 2.44%
-Balance Sheet Strength: Strong


Walmart, that’s 11,462 stores (as at February 2015), 71 banners, presence in 27 countries and over 2.2 million employees (1.3 million in the US alone). Did the title mention WMT was a giant? Let’s dig further to see what else we can find…

Business Segments

Walmart operates under three segments;

Walmart U.S. includes all Walmart stores in the US as well as the online segment. This represents 59% of the company’s net sales. It offers all kinds of sizes from the regular retail store to the supercenter opened 24/7. It pretty much offers everything you need in your home split into 6 segments: grocery, entertainment, health and wellness, hard goods, apparel and home.

WMT is currently investing massively in their online store in order to improve the customer experience and to provide faster delivery. In other words; they are finished with deferring the online market to another giant; Amazon (AMZN). This is a promising, but risky move as it could cost the Giant of savers lots of money. So far, the bet seems to be yielding rewards as online sales increased by 30% in 2014.

Walmart International serves 26 countries and count for 29% of its sales. It operates in a similar way as the US as it also offers a variety of retail store size and product offering.

Sam’s Club is the third division of WMT and operates as warehouse with membership programs. Sam’s Club counts for 12% of the company’s sales. Walmart definitely represents the US economy as similar to the global country’s GDP, WMT depends on US custumers for 71% of its business. Similar to what is happening with Walmart US, the company is shifting an important part of its sales on the internet. Traffic on Sam’s Club’s mobile platform nearly doubled during 2014.

The company is making huge effort to advertise itself as a good corporate citizen. It focuses on many aspects of sustainability as a company that buys local products, employs many Americans, offers environmental alternatives and helps customers save billions of dollars:

cdn.corporate.walmart.comSource: Walmart investors relation site


After all, Walmart promise is to offer any product in store at the lowest price… everyday!


Price to Earnings: 16.19
Price to Free Cash Flow: 15.87
Price to Book: 3.183
Return on Equity: 20.11%

While the company is showing a strong profile, we can’t say it was the WMT of 90s where the company was severely overvalued with P/E ratio over 30.


wmt revenue

WMT was greatly helped by a stronger economy in the US over the past 5 years. Its revenue has never been higher and we can keep our optimism up as the US consumer has more money in his pocket to spend this year due to low gasoline prices.

Earnings and Dividends

wmt earnings and divsource: Ycharts

I like to use this chart to see how reliable the company’s dividend will be in the future. Since we are talking about a dividend aristocrat (over 25 consecutive years of dividend increase), I’m not too worried about WMT ability to increase its dividend. Plus, the dividend yield has become more interesting since the 2008 crash:

Approximate historical dividend yield at beginning of each year:

wmt historical div yield





The company meets my requirements described in my 7 investing rules (interesting after the 2008 crash). However, the payout ratio is growing faster of late which leads me to think we might face smaller dividend increases in the future. On the other hand, it would be quite surprising to see a company in a mature market keep up a 16% annual dividend increase rate forever.


How Does WMT Spend Its Cash?

Walmart is a great example of a “perfect” dividend payer. Over the past 4 quarters, the company generated over 16 billion in free cash flow. In their last fiscal year, they returned 12.8 billion to shareholders via share repurchases ($6.7) and dividend distribution ($6.1). Each year, it tends to buy back more shares than increasing their dividend as the graph suggests:

wmt returns to shareholders

While the company is using tons of cash to buy back their shares, dividend investors are not left in the cold. This February, it was their 41st consecutive annual dividend increase. In 2015, management expects to also use 12.4 to 13.4 billion to improve both physical and digital assets and open between 35 and 39 million square feet of retail stores.

Balance Sheet

Walmart shows a relatively strong balance sheet. WMT has a Debt to equity ratio of 1.503 but a current ratio of 0.9695. While this is close to reaching the psychological mark of 1, I’d like to see this ratio going up a bit. On the other hand, the long term debt is only 3 times the average net income.

Investment Thesis

While many other companies will post slow earnings growth due to currency headwinds, this should not hurt WMT too much. Their bread & butter still comes from the US where the economy is getting better and better right now. While it’s not perfect (new created jobs are usually paid less than the previous ones), as long as Americans earn a paycheck, they will spend it at Walmart.

The fact WMT doesn’t ignore the online industry reassures me for its future. It is true that going online is often like hiking Everest for a classic brick & mortar retail store, but Walmart seems to be up for the challenge. It benefits from great branding and people look to buy from Walmart. E-commerce is one of their three focuses in 2015 (along with making improvements to their overall supply chain and opening new stores). I like to see a company focusing on both cutting costs while using various paths for growth.


The company is a money making machine for any patient dividend investor. However, the constant pressure on margin related to WMT’s business model remains an important risk for any investor. It doesn’t mean that because it has worked in the past, it will always work in the future.

As WMT is going to play in Amazon’s online playground, there is nothing to improve the business’ margin. This war could cost lots of cash flow and it doesn’t mean it will gain any important market share. Looking at AMZN business model, many investors complain profits are not at the center of the company’s focus. Offering low prices all the time is a tough business model to make profitable.

Another point of concern is the rising interest rates waiting on the doorstep. The market is currently concerned about how fast the FED will increase its rate and this could affect US economy. Therefore, WMT may be hit by these measures.

Finally, there is lots of pressures on increasing minimal wages for Walmart employees. The company announced a first raise in February 2015 and it may only be the beginning for the years to come.

Stock Valuation

Let’s start with the 10 year P/E ratio history:

wmt pe ratioSource: Ycharts

Besides a dip near 2012, we can see that WMT is currently trading at a relatively low price compared to its history. The recent dip in the PE ratio may be a sign of a good entry point. Let’s take a look at the DCF and DDM to make sure we are right.

Using the Discounted Cash Flow Analysis, we look at WMT as a simple money making machine. The point is to assess the value of the company by considering its cash flow generation capacity. Considering a FCF to grow by 7% for the next ten years and then by 4% and a discount rate of 10%, we have a market capitalization of $271B while the current market cap is at $260B. I used a 7% growth rate for the next 10 years because I expect the company to benefit from a long term healthy economy in the States. Then, I dropped it to 4% to reflect a more sustainable growth. As for the discount rate, I use a 10% as the company is slightly more at risk than McDonald’s for example due to smaller margins.

wmt intrinsic valueSource: Dividend Toolkit

The Gordon Growth Model can be used to estimate ranges of fair value for the stock. The dividend growth rate averaged 16% over the last seven years and but I don’t think we can expect such impressive results forever.

Using an expected 10% dividend growth rate for the first 10 years and then 7% and a 10% discount rate, the fair value is only $87.68, which is over the current share price of around $80.

wmt intrinsic value 2

It seems WMT is currently trading with a 10% discount. Just for fun, I’ve looked at the Morningstar valuation and it stands at $83. Therefore, I can say I’m not too far out in left field with my estimates.


Margins will remain a concern and even the market drops the business valuation after February announcement on increasing wages. Nonetheless, we are currently looking at a very strong company showing the will to shift a part of its business online to explore more paths to growth.

For this reason and the fact the stock recently dropped, I think WMT is a good buy right now.

Full Disclosure: As of this writing, WMT is part of our DSR Portfolios. We do not hold AMZN.

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McDonald’s Stock Analysis – Is the Golden Age of the Golden Arches Behind us?

McDonald’s Corp (MCD) franchises and operates McDonald’s restaurants in the food service industry. Its geographic segments include the United States, Europe, Asia-Pacific, the Middle East and Africa.stock report

-Seven Year Revenue Growth Rate: 3.47%
-Seven Year EPS Growth Rate: 7.19%
-Seven Year Dividend Growth Rate: 18.49%
-Current Dividend Yield: 3.52%
-Balance Sheet Strength: Strong



Mickey D doesn’t need an introduction anymore. It’s the largest fast food retailer with over 36,000 restaurants servicing over 69 million clients throughout 100 countries every day. It was one of the very few stocks to practically ignore the 2008 recession and continue to reward investors. However, the stock is now lagging the market since mid-2014. This is what caught my attention and led me to take a look at one of the most famous aristocrat stocks.

MCD aristocrat

Source: Ychart


Business Segments

The company doesn’t offer 100 different products as you can eat the very same Big Mac in London UK that you would in Tokyo. However, management has divided its business according its geographic segments:


MCD shows decreasing sales of -1.7% in US for 2014 due to negative growth in guest traffic. In other words, the golden arch doesn’t serve as many clients as before. Competition is very tough and with MCD’s recent announcement to raise wages, there is little to help improve margins.


Economic weakness in both France and Germany along with a massive consumer confidence drop in Russia pulled sales down by 1.1% and operating income by 11%. A strong US dollar doesn’t help the company either. The only good news is coming from the UK where sales were up in 2014.

Asia/Pacific, Middle East & Africa

Supplier issues in China hit the company’s sales by 4.8% and operating income by 44%. While China is a very promising country for burgers, supplier issues may slow down MCD enthusiasm.

Other countries including Canada and Latin America as well as Corporate

McDonald’s restaurants are 80% owned by franchisees as followed:

57% conventional franchisees

24% licensed to foreign affiliates or developmental licensees

18% are company owned.

Source: McDonald’s website.

At first glance, I’m under the impression of looking at a company that was once the perfect example of a successful business model but the star seems to have dimmed a little. Let’s break down some numbers to see what MCD has to offer its shareholders.



Price to Earnings: 20.02
Price to Free Cash Flow: 22.42
Price to Book: 7.23
Return on Equity: 31.81%



MCD revenue

Revenue Graph from Ycharts

As you can see, the company seems to have hit a plateau since 2012. A stronger US dollar, rough competition and global economic slowdown explain why MCD is finding it hard to sell more burgers. The company is also struggling to deliver an updated menu that would help grab back market share from its competitors.


Earnings and Dividends

MCD earnings and div

Source: Ycharts

We can see in the previous graph that both sales and earnings are slowing down since 2014. The dividend payout has increased significantly but we can now wonder if the company will be able to maintain such a pace. The payout ratio hiked significantly over the past 12 months. Management has been talking about “challenging markets” for a few quarters now but doesn’t seem to be able to provide a long term solution.
Approximate historical dividend yield at beginning of each year:

mcd div yield







While the overall dividend growth over the past 7 years is impressive, we can see that the numbers have been back to a more normal pace over the past three years. Exactly at the same time when we can see the business model struggling while facing fierce competition. I don’t think we can expect a dividend growth of over 5% in the upcoming years.


How Does MCD Spend Its Cash?

The company focuses on distributing cash to its shareholders through numerous consecutive years of dividend increases along with a strong share buyback program. In the last quarter of 2014, the company had redistributed 1.8 billion alone. In 2014, management announced they will redistribute a total of 18 to 20 billion to shareholders through dividend payments and share buybacks. MCD also wants to refranchise a total of 1,500 restaurants and reallocate resources to higher growth initiatives.

Regardless of the business’ recent slowdown, MCD keeps generating a high level of cash flow and will use its liquidity to reward investors for their patience.


Balance Sheet

McDonald’s shows a strong balance sheet. McDonald’s Debt to Equity ratio is fairly low at 1.667, long term debt is only 2.8 times its average net income and (obviously) the MCD current ratio is in very good standing (1.5). The company’s biggest assets are not its burgers, coffee offerings or its branding. The company’s biggest asset is its real estate properties. With over 33B in buildings and land, the company owns some of the best locations in the world for retail business.


Investment Thesis

An investment in MCD today is an investment to build a core dividend growth portfolio. The company will not be your home run this year and will not post double digit growth. However, the business will definitely pay a higher dividend next year and its payment is not at risk for the moment.



I see a long term risk for MCD in that it hasn’t proven to the market it can reinvent Mickey D and generate growth. While the McCafé has been a good addition to its menu, it doesn’t seem to be enough to grab market share in this highly competitive industry.

Healthy food trends are also hurting MCD as burgers are not seen as a good choice for many consumers. While I’m pretty sure people will continue to eat burgers and fries, I’m also convince that fast food restaurants are no longer on the fast growing track anymore.

I’m afraid that MCD may become nothing more than a strong dividend payer that will lag the market in the years to come. Let’s see if the company is trading at an interesting value before coming to our conclusion.



I’ll start the valuation process by looking at its historical P/E ratio. This will give me an indication of where the market sees the stock:

MCD PE ratio

The company’s valuation seems to be at its highest point since 2006 (excluding the market crash of 2008). The stock seems to be one step away frombeing overvalued at the moment using the P/E approach.

Since my goal is to buy dividend stocks, I always use the Dividend Discount Model to value a company. Since the company shows a strong balance sheet and because the company owns lots of real estate property, I will use a discount rate of 9%. While the 7 years dividend growth is standing at 18%, I don’t think it’s fair to expect such high dividend increases for the future. A 5.5% dividend increase seems more reasonable and achievable considering the recent payout ratio. Here’s what the Dividend Toolkit Dividend Discount Model Table gives me:

mcd intrinsic value


The stock seems fairly price with a discounted rate of 9% but if you are more concerned about its lower margins and use a higher discount rate, you quickly put MCD in the overvalued stock category.



Overall, we can say MCD is not a trading bargain at the moment. The price/earnings ratio is a bit high and the DDM gives a fair price considering my assumptions. The hope of more franchise restaurants in China along with massive share buybacks is maintaining the current stock price level. The fact that MCD is the leader in the breakfast industry and the strong dividend payment will continue to attract investors, I can see the company being part of a core conservative portfolio to provide both stability and good quarterly payments.

However, higher commodity prices related to the food industry combined with aggressive competition and increasing wages are all factors that will slow down McDonald’s profitability over the upcoming years. If I had $10,000 free in my investment account, I would not use it to buy MCD. I think it would be safe to wait for another year to see if the company is doing more than a simple step in the right direction.

Full Disclosure: As of this writing, MCD is part of our DSR Portfolios.

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