Recent Buy: Reliance Steel & Aluminum

Jun 12, 2015: Bought 40 shares of RS at $63.98 per share.

Founded in 1939 and headquartered in Los Angeles, California, Reliance Steel & Aluminum (NYSE:RS) is one of the largest metals service center companies in the United States. The company provides metals processing services and distributes a line of approximately 100,000 metal products, including alloy, aluminum, brass, copper, carbon steel, stainless steel, titanium and specialty steel products, to customers in a broad range of industries. 

RS is the Materials sector winner and is ranked 2^nd in the June 2015 edition of my 10 Dividend Growth Stocks article series. The company has a 5-year streak of consecutive dividend increases and pays quarterly dividends of 40¢ per share in the months of March, June, September and December. What impresses me most is the company's 5-yr dividend growth rate of 28.5%!

My buy price results in an initial yield on cost (YoC) of 2.5%.

RS started paying dividends in December 1994. The company failed to raise its quarterly dividend in 2010, essentially freezing it at 10¢ per share until the increase to 12¢ in March 2011. Since then, RS has reestablished a 5-year history of consecutive dividend increases:


One of the reasons I like RS is that it has a great payout ratio. The following chart shows that the company easily covers its dividend payments through earnings:


In the last 10 years, RS has outperformed the S&P 500 by a margin better than 2-to-1. The following 10-year charts show the split-adjusted price of RS and the stock's performance relative to the S&P 500. In the price chart, my buy price is indicated in green and the gold-colored line represents the 13-week exponential moving average.

Source: Scottrade

An investment in RS 10 years ago would have returned 257%, including dividends. That equates to a compound annualized growth rate of 14%, which is quite impressive! 

Source: GuruFocus

Analysis of RS

My fair value estimate of RS is $72.59, so I bought shares at a discount of about 12%. The following table provides some key statistics, with highlighted values relating directly to my selection criteria.


RS passes the following of my selection criteria:

• A streak of at least 5 years of dividend increases (5 years)
• Dividend yield is at least 2.50% (2.50%)
• Chowder rule: Dividend yield plus 5-year dividend growth rate exceeds 8% (30.94%)
• Earnings per share (EPS) percentage payout is less than 40% (32.59%)
• Price to earnings ratio (P/E) is less than 20 (TTM 13.22x, Forward 11.60x)
• P/E to annual EPS growth (PEG) ratio is less than 2 (1.44)
• 5-year dividend growth rate is at least 10% (28.47%)
• Reasonable confidence in continued dividend growth (Yes)
• Price discount is at least 5% of fair value estimate (11.84%)

RS fails the following of my selection criteria:

• Debt to equity ratio is below 50% (60%)

Based on these statistics, RS earns 6 out of a possible 7 stars: (******-)

Other ratings for RS

S&P Capital IQ's Stock Report  (*****) Strong Buy  MorningStar Rating  (***--)  TheStreet Ratings Rating  Buy [B+]  The Motley Fool's CAPS Rating  (*****)  Thomson Reuters StockReport+  (7/10) Neutral   Zacks Rank (Style Scores*)  2-Buy (B•A•C)

*(Growth • Value • Momentum)

Concluding Remarks

I like RS for several reasons, including the stock's 5-year dividend growth rate and its low payout ratio. Furthermore, with a fair value estimate of $72.59, I'm buying shares at a discount of about 12%.

Just today, analysts at Jefferies Group raised their price target on RS from $70.00 to $73.00. Analysts at Zacks have a $74.00 price target on the stock, while analysts at Credit Suisse have a $77.00 price. MorningStar's fair value estimate is $69.00, while S&P Capital has a fair value calculation of $90.00.

RS last reported earnings on 23 April 2015, recording higher profits in Q1-2015 (an increase of 16.2% over Q1-2014) and EPS of $1.30, up 17.1% from a year ago. Earnings exceeded the company's own expectations, aided by strong gross profit margins and effective expense control.

The company remains committed to offering incremental returns to shareholders. In February, RS increased its dividend by 2.8% to 40¢ a share. The company has repurchased a total of $250 million of its common stock since October 2014.

Risks include challenges in weak steel industry fundamentals, with cheaper steel being imported and overcapacity outpacing demand; low demand levels for non-residential construction, the company's largest end market; and continued pressure in the company's energy-related business due to weak oil pricing.

Overall, I believe RS is positioning itself for growth across several end markets. The company has an aggressive acquisition strategy and is focusing on diversifying its products, geographic footprint and customers. I think this is a good company to invest in.

40 shares of RS adds $64 to DivGro's projected annual dividend income. I've updated my portfolio to reflect this purchase.

What do you think of RS? Do you own shares, or are you planning to buy any?