Herman Miller, Inc. (MLHR) operates in the business equipment niche and currently has approximately 8,000 employees. The long-term trend for the stock is most definitely up as shares have basically continued to make higher highs for the best part of a decade now. As chartists, we believe that any possible fundamental which could affect the trajectory of the share price has already been reflected in the price. Therefore, when we have a clear trend in place, we like to investigate more. Trend-following is at the core of the technical analysis approach. We believe that any long-term trend has more than a 50/50 chance of continuing rather than reversing.
The direction of the long-term trend as we can see below is the result of strong fundamentals which we can see in the financials. Top line sales for example comes in at $2.61 billion over the past four quarters. This number has been driven forward by the recent $670.9 million figure in Q1 which was a 7.4% increase over the same period of 12 months prior. We are seeing sales re-accelerating which is encouraging. Remember the 10-year average top line growth comes in at just over 4.6%. Sales growth is the most obvious way earnings growth can be sustained over the long term. Suffice it to say, we like the trend here along with the growth in the firm's gross margins.
Furthermore, an excellent quarter of earnings growth (33%) has resulted in projected earnings growth coming in just short of 15% for this current fiscal year. We are seeing the benefits of top line growth especially when one considers that the 10-year average top line growth rate comes in at just over 8%.
Apart from sales and profit, another important consideration for investors is Herman Miller's dividend. At present, the yield comes in at 1.88%. Although, the yield may be under-average in this sector, we already have seen strong reasons why we should see strong growth in this key area. Therefore, let's have a look at how some of the firm's key dividend metrics have been trending in order to get a read on how the dividend will behave going forward.
Firstly, in terms of dividend growth, Herman Miller has grown its dividend by 8 years now. Its current 10-Year growth rate comes in at just under 8% whereas its 3-Year growth rate comes in at 9.5%. As long as the other key dividend metrics check out, we see continued dividend growth over the next few years which should push into double-digit percentages. Dividend growth is important as it protects purchasing power while it also demonstrates confidence in how management foresees how its earnings will trend.
We see no issue with affordability as Herman Miller's payout ratio from an earnings calculation comes in at 27.87% and from a free cash flow standpoint, comes in at 30.23%. Again, the trend here is encouraging as the payout ratio both from earnings and free cash flow is at its lowest point over the last five years. Suffice it to say, there is ample room to grow that dividend significantly if management so wishes.
We also find it useful to see if the financial base of the firm in question is on a sound footing. Free cash flow numbers and payout ratios can easily look good if the firm in question is leveraging the balance sheet, for example. However, with Herman Miller, we see that its debt to equity ratio comes in at a solid 0.64 and its interest coverage ratio at just over 18. Suffice it to say, the firm appears to be trading off a solid financial footing which is obviously crucial for sustained long-term dividend growth.
$2.97 per share is expected in earnings this year which as mentioned would be a 14%+ annual growth rate if achieved. Even if we have a pullback here in the short term from overbought conditions, it would be a buying opportunity in our opinion. Let's see what the firm can deliver in its upcoming Q2 earnings.
Elevation Code's blueprint is simple. To relentlessly be on the hunt for attractive setups through value plays, swing plays or volatility plays. Trading a wide range of strategies gives us massive diversification, which is key. We started with $100k. The portfolio will not stop until it reaches $1 million.
Join Us here
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.