HOG PE Ratio (TTM) data by YCharts
Dividend growth could pay off big in the long term
Harley currently pays a $0.35 per-share quarterly dividend, which works out to a 2.47% yield at current prices. That may not seem like much, but here's some added context:
HOG Dividend data by YCharts .
Since the end of the recession, Harley has steadily pumped up its dividend. At the same time, the company pays out only about 35% of profits in dividends, giving it both a relatively wide margin of safety -- something it didn't have as much of coming into the financial crisis, and which played a big role in its dividend getting cut -- and supporting its ability to continue increasing payouts in the future.
If Harley's management is able to continue increasing the dividend in coming years, that steady income boost could lead to fantastic long-term returns.
But don't ignore debt and competitive pressure in a low-growth environment
Competition is a reality in essentially every industry, and it often pushes companies to innovate, become more efficient, and otherwise improve their businesses and products. But at the same time, the segment of the motorcycle industry that Harley dominates has been slow to grow in recent years, while its efforts to expand overseas have been slow to pay off.
Harley's sales in the second quarter were mixed at best. Motorcycle and related revenue was basically flat, while total global units sold was up a scant 3.5%. Earnings per share were up 8%, to $1.55 per share, but both operating income and net income were down from last year. At the same time, Polaris' motorcycle brands, Victory and Indian, reported 23% growth in sales.
Put one and one together, and when a competitor is growing sales faster than you are (and faster than the overall market), it means it's taking market share from you. That's happening to Harley now.
Harley also carries a significant amount of debt that creates a risk that shouldn't be ignored. On the one hand, a significant amount of that debt is tied to loans issued by Harley-Davidson's financial services segment to Harley buyers. But on the other hand, all that consumer debt created a not-so-insignificant risk for the company during the Great Recession.
And while I'm not saying that the company is destined to repeat the past, there's no getting around the fact that $7 billion in long-term debt creates some risk, and that risk is compounded because Harley makes and sells products that people will put off buying (or making the loan payment on) when money is tight.
Cyclical risk, but long-term opportunity
Competition isn't likely to put Harley-Davidson in the ditch, though Polaris' Indian and Victory brands could take even more market share in the short term. But the Harley-Davidson brand is legendary, and as long as the company continues to make a high-quality product, its brand appeal should remain strong. Furthermore, cyclical demand will ebb and flow over time, and the long-term growth of the global economy -- particularly as the global middle class expands -- should be great for the company's long-term prospects.
However, its large debt shouldn't be ignored. Yes, the debt is largely secured by motorcycle loans, but it's also a risk, particularly in a poor economy, when a motorcycle payment will get skipped before a house payment. The catch? The global economy isn't horrible -- it's just not very good. If it continues to improve, Harley's prospects could blossom. If things deteriorate, Harley could get squeezed by falling sales and a deteriorating loan portfolio. So there's your risk.
But even with those risks, the long-term prospects look solid for Harley Davidson, and its shares are relatively undervalued. Factor in the potential for further dividend growth in the years to come, and buying its shares at the current value point should pay off.
A secret billion-dollar stock opportunity
The world's biggest tech company forgot to show you something, but a few Wall Street analysts and the Fool didn't miss a beat: There's a small company that's powering their brand-new gadgets and the coming revolution in technology. And we think its stock price has nearly unlimited room to run for early in-the-know investors! To be one of them, just click here .
Jason Hall has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Polaris Industries. Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
