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This Stock Just Hiked Its Dividend 25%. Should You Buy?

If history is any indication, the best thing you can do with your cash is buy dividend stocks. Study after study reinforces the idea that dividend stocks outperform others by a wide margin.

For example, J.P. Morgan Asset Management found that stocks that initiated and then raised their payouts over the 40-year period between 1972 and 2012 returned an average of 9.5% annually versus just 1.6% for non-dividend-paying stocks.

That's why Smith & Wesson Brands' (NASDAQ: SWBI) decision to hike its payout 25% should make this stock a buy for income investors.

Image source: Getty Images.

Sharing success with investors

The firearms manufacturer began paying a quarterly dividend only following its spinoff of American Outdoor Brands in 2020. While that first dividend was $0.05 per share, Smith & Wesson hiked it 60% last year to $0.08 per share, and now, at the start of its third year of paying dividends, has raised it once more, to $0.10 per share.

Unlike rival Sturm, Ruger & Company, however, which has paid a dividend consistently since 2009 but does so according to a percentage of its net income (approximately 40%), Smith & Wesson's dividend is a fixed amount every quarter. While Ruger's dividend payment will fluctuate every quarter as its profits rise and fall, Smith & Wesson's remains steady.

CFO and Executive VP Deana McPherson says the board of directors was able to increase the dividend again because the gunmaker's "balance sheet remains strong with $120.7 million of cash and no debt, and we expect to continue generating strong cash flow for the foreseeable future."

Image source: Getty Images.

Primed for future growth

Smith & Wesson's fiscal fourth-quarter earnings report showed that while sales were down from last year, they still handily beat Wall Street's expectations. Revenue of $181 million fell 44% from the year-ago period but was well ahead of analysts' prediction of $168 million. Adjusted profits of $0.82 per share also trounced forecasts of $0.57 per share , though they were down 52% year over year.

Business should continue to be robust, even if it's down relative to last year, as it is returning to a more normalized trajectory, one that has always been of greater growth.

The Supreme Court just reaffirmed the Constitution protects the right to carry a firearm outside the home. Weapons designed for concealed carry are a significant part of Smith & Wesson's business, such as its M&P Shield line, which is one of the most popular pistols on the market. Some 5 million of the handguns have been sold since it was first introduced in 2012.

Smith & Wesson has partnered with Vista Outdoor's (NYSE: VSTO) Federal Premium Ammunition to launch their new 30 Super Carry ammo, which was developed specifically for the concealed carry market.

A deep value stock

In short, Smith & Wesson's business is solid, it's willing to share its success with investors through dividends and share buybacks, and its stock is steeply discounted.

You'll never find Smith & Wesson Brands trading at rich premiums, but even after the stock jumped over 21% last week, shares go for just three times trailing earnings, seven times next year's estimates, and a fraction of its sales and expected earnings growth rate . At less than four times free cash flow, the firearms maker is a bargain basement dividend stock that is a strong buy.

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Rich Duprey has positions in Smith & Wesson Brands, Inc. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.


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