Right now, shares in Polaris (NYSE:PII) come with a 3.2% dividend yield. UK investors might not have come across the company before, but I think it could be one of the best opportunities at the moment.
The share price is at a 52-week low at the moment, but I don’t think there’s anything wrong with the underlying business. I think there’s a good case to be made for buying the stock at today’s prices.
What does Polaris do?
Since Polaris isn’t a stock UK investors typically pay much attention to, it’s worth saying a bit about what it does. The firm designs and manufactures recreational vehicles, mostly for powersports.
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The company has a number of key strengths that I think make it worth looking at from an investment perspective. The first is its status as a global leader in the powersports industry.
This allows Polaris to build good relationships with dealers, giving it an advantage over competitors. Its strong brands also help generate customer loyalty in an industry where switching costs are low.
The business is also growing impressively, averaging 7% annual revenue growth over the last decade. And the dividend has increased each year for the last 29 years.
Why is it so cheap?
At a price-to-earnings (P/E) ratio of 12 based on last year’s earnings, Polaris shares look cheap at the moment. And there’s a reason for that – the company gets around 80% of its revenues from the US.
Several businesses making products people want but don’t need have been finding the US difficult lately. And this is because GDP growth has been relatively weak during the first three months of 2024.
For Polaris, this has been showing up in earnings. The company reported lower-than-expected revenues and earnings per share of $0.23 between January and March, compared to $2.05 a year ago.
There’s no question that investing in a business that sells discretionary products in a market that is under macroeconomic pressure is risky. But I think the decline looks like a terrific opportunity.
How serious are the risks?
There are a few reasons I think the Polaris share price looks hugely attractive at the moment. The first is the dividend.
The company currently pays out $2.64 per share to investors. And with last year’s earnings coming in at $8.80, things have to get much worse for a long time before there’s any danger of a dividend cut.
Another is the firm’s balance sheet. The danger with a cyclical company like Polaris is that it needs to be able to meet its financial obligations even when sales are slow.
I don’t think there’s any danger on that front either, though. Interest payments account for around 25% of the firm’s operating income, leaving plenty of headroom in this area.
A stock to consider buying
Warren Buffett advises investors to be greedy when others are fearful. But that can be a really bad idea – sometimes investors are fearful for a reason.
With Polaris, though, I don’t think this is the case. I think this is a terrific opportunity to buy shares in a quality business at an unusually good price.
