Dividend Stock Analysis – MATW

As I’ve indicated multiple times in the past, I am a big fan of so-called “sin stocks“. These are companies that work in industries that are often considered unethical or immoral. Great examples of such sectors include tobacco (MO, PM), guns (RGR, SWHC), alcohol (BF/A, DEO, STZ), gambling (LVS, IGT), prisons (GEO, CXW), and the military-industrial complex (LMT, RTN). What really appeals to me about them is that their products will always be desired and purchased, no matter the state of the economy. People will always need to drink and smoke and countries will always need to defend themselves, you know? There’s also another sector that people will always need to use, death care. While not exactly “sinful”, people will always die, and will always need to be laid to rest with dignity and respect. And there are publicly-traded companies that provide those needed services. Today, let’s look at one such death care company, Matthews International (MATW).

Quick Background:

From Scottrade:

Matthews International Corporation (Matthews), is a designer, manufacturer and marketer of memorialization products and brand solutions. Memorialization products consist of bronze and granite memorials and other memorialization products, caskets and cremation equipment for the cemetery and funeral home industries. Brand solutions include graphics imaging products and services, marking and fulfillment systems products, and merchandising solutions. During fiscal year ended September 30, 2013 (fiscal 2013), the Company changed the name of its Bronze, Casket and Marking Products segments to the Cemetery Products segment, the Funeral Home Products segment and the Marking and Fulfillment Systems segment, respectively. The Company’s products and operations are consisted of six business segments: Cemetery Products, Funeral Home Products, Cremation, Graphics Imaging, Marking and Fulfillment Systems, and Merchandising Solutions.

The company was founded in 1850, and is based in Pittsburgh, Pennsylvania. MATW’s main peer group int eh death care industry include Service Corp International (SCI), Carriage Services Inc (CSV), and Hillenbrand Inc (HI) through its Batesville subsidiary.

For more basic information, check out the company’s website and the 2014 annual report.

Fun fact: An investment of $10,000 in December 1995 would be worth $103,689.79 today, all dividends reinvested. This yields a annual rate of return of 12.8%. (Source: FAST Graphs)

Investment Criteria:

Now that we know MATW a bit better, let’s run it through our screening criteria:

• Pays a dividend: Yes
• Has 5+ years of dividend increases: Yes (20 years)
• Has not frozen dividend for over 8 quarters: Yes
• Has a Chowder number of 12 or more: Yes (12.8)
• Has am EPS payout ratio of less than 70%: Yes (33.33%)
• Pays a dividend monthly or quarterly: Yes (Quarterly; January, April, July, November)

• Has an S&P Quality Ranking of ‘A-‘ or better: No (B+)
• Has generally increasing earnings over the past 10+ years: Yes
• Is fairly valued/undervalued according to the Normal P/E ratio (blue line): No
• Is fairly valued/undervalued according to the Intrinsic P/E ratio (orange line): No

Other Bonus Ratings:

• Thompson Reuters StockReport: 7 (optimized score of 4)
  • Scale is 1-10, 10 being best, 1 being worst
  • Optimized scores weight insider trading and price momentum heavier than other criteria

Financial Overview:

The company has a dividend yield on the lower end of the scale at 1.07%, and pays out $0.52 per share annually. It has been paying an increasing dividend ever since going public in 1994; July marked the 20th year of being publicly-traded and the 20th dividend increase. The payout ratio is reasonable at 33.33%, but the debt/equity ratio is a bit more concerning at 0.9. But this is still less than the 1.8 average for the peer group (source: Scottrade). The shares outstanding count has generally been on a satisfying downtrend, with the exception of a spike in mid-2014. I suspect this spike came from the acquisition of Schawk Inc in a cash and stock deal, and is therefore nothing to be concerned with. The company has not had a stock split since 2001.

MATW’s current P/E ratio is 28.2, and its one-year forward P/E ratio is 14.5, implying a slighty decrease in price per share and an increase in earning. The gross margin is better than peers at 35.71% vs 32.61%. However, it falls short in operating and profit margins (7.69% vs 17.50% and 4.20% vs 7.04%)

Over the next five years, MATW’s earning will increase by 11.0%, with an estimated total return of 8.3%. This is a bit lower than the average of the peer group’s ETR – SCI with 4.3%, CSV with 16.0%, and HI with 14.5%, thereby indicating slight underperformance. Do keep in mind that CSV has only 1/4th the market cap of MATW, so naturally both its risk and reward will be much higher.

Final conclusion:

Unfortunately, MATW does not meet my criteria for purchase at this time. It is overvalued, and the quality ranking is below my minimum threshold. I am also not thrilled with the margins, the constant earnings since the Great Recession, and the debt. I do not consider MATW a buy.

I will say that although it is not the best company I have analyzed, I am intrigued by what the company has to offer. I like it a little better than the other death care company on my watchlist, SCI, mostly due to MATW’s commitment to the dividend (its dividend growth streak is five times as long as SCI’s) and the debt. Ergo, I will be removing SCI from my watchlist (for now) and replacing it with MATW, in the hopes I can purchase MATW at a later date.

What do you think? Does MATW make the cut for your portfolio? Also, how can I improve future analyses?

Disclosure: Long PM

All data is accurate as of market close, 02.20/2015. My stock analysis archive page has been updated accordingly. Please read my disclaimer here before choosing to invest. Company logo image source is available here. Data source is FAST Graphs, David Fish’s US Dividend Champions List, or company materials, unless otherwise indicated.

Tags: dividend-stock-analysis, Matthews International Corp., MATW