A Stock I Recommended in January is up More Than 30%… and it’s STILL a “Buy”

On Jan. 4, I told you about a great income-producing stock with a streak of dividend increases going back nearly six decades. Specifically, the company has raised its dividend every year since 1954, when Dwight D. Eisenhower was President.

Well, the stock is up more than 30% since Jan 4, so investors have clearly recognized its worth. Still, the run-up raises a good question: Is the stock still worth buying or is it now too pricey?

In my opinion, Diebold Inc. (NYSE: DBD) remains an unequivocal “buy and hold” for the long-term.

One reason is because it’s very likely shareholders will continue to enjoy reliable dividend growth for the reasons I first mentioned back in January, such as prospects for very solid growth in revenue and earnings during the next three to five years — at least. In January, analysts were projecting annualized growth rates of 5% for revenue and 8% for earnings, and those estimates haven’t dropped off at all. Annual revenue is expected rise from $2.8 billion in 2011 to at least $3.6 billion in 2016. Earnings per share (EPS) are projected to climb from $2.31 to $3.39 during that time. That puts the stock at a very reasonable price-to-earnings (P/E) ratio of less than 12, based on recent prices.

These favorable projections reflect rising demand globally, but especially in emerging markets, for the automatic teller machines (ATMs) Diebold makes, sells and services. In addition to the big sale late last year to Banco Santander Brazil (NYSE: BSBR) I described in my previous article, Diebold has been getting a lot business in the Asia/Pacific region, mainly China and India. In the first quarter of 2012, for instance, sales in the region rose 15%, climbing to $96.2 million from $83.9 million in the first quarter of 2011.

#-ad_banner-#Management foresees continued double-digit revenue growth in the Asia/Pacific region in coming quarters. Globally, management predicts total revenue from all sources will grow by 7-10% in 2012, a substantial increase from the 3-6% growth rate it had forecast a few months ago.

At this point, ATMs account for the lion’s share — 80% — of revenue. The company is, however, also a leading manufacturer of bank vaults, video-surveillance systems, alarms and other intrusion-detection devices. As a group, these products generate 19% of revenue. The company gets the rest by manufacturing event recorders, electronic voting machines and lottery machines.

Diebold’s payout ratio (the percentage of earnings paid out as dividends) of 39% is very sustainable, so I’m comfortable applying it to projected earnings to come up with a ballpark estimate of future dividends. For instance, if you multiply that rate by 2016’s EPS projection of $3.39, you get a dividend of $1.32 per share (0.39 X $3.39 = $1.32) — a solid 18% increase from the 2011 dividend of $1.12 a share. And this estimate may well be on the low end, considering management has earmarked 50% of 2012’s earnings for dividends, though it remains to be seen if the higher payout ratio persists in the long-term. In light of Diebold’s positive overall outlook for the long-term, I think the chances of this are good.

In addition to a nice dividend, Diebold’s got solid long-term appreciation potential, based on the fact investors are currently willing to pay a price-to-earnings (P/E) ratio of 18 for the stock. If this continues and earnings rise to $3.39 in five years as projected, the stock should be in the range of $61 in 2016 (18 X $3.39 = $61.02) — more than a 50%  gain from the current price of around $40 a share.

Risks to consider: Performance has been weak in certain regions, particularly Europe, the Middle East and Africa, where sales dropped 9% in the first quarter to $64.7 million from $71.4 million in the first quarter of 2011. The region accounts for almost 10% of total sales, so further poor performance there could hinder Diebold’s overall results in coming quarters.

Action to Take –>
Because of the recent run-up, Diebold’s stock is now yielding 2.8%. It was yielding 3.7% at the time I first wrote about it. But that’s OK. Although the stock was obviously a better buy four months ago, it’s still well worth investing in now. A 2.8% yield is still very solid. And the dividend is very likely to continue rising at a brisk pace. Based on my estimate of the stock’s growth potential, shareholders could also see the value of their investment rise nicely in the next three to five years. Over a five-year period, the 50% gain I mentioned earlier translates to a return of 8.4% per year.