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The Best Dividend Stock in North America

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Rocky Mountain Dealerships (TSX:RME) operates 42 agriculture and construction equipment dealerships across Alberta, Saskatchewan, and Manitoba. The company was formed from Hi-Way Service’s acquisition of Hammer Equipment in 2007. The company is the largest independent supplier of Case IH and Case Construction Brands in North America.

Rocky Mountain Dealerships appears to be extremely cheap with a market cap of $175 million, low price-to-earnings ratio of 9.8, and a price-to-book ratio of one. The company engages in a variety of activities in the agricultural and construction equipment dealership industry.

One way the company looks to differentiate itself from competitors is by forging long-lasting partnerships with suppliers, which is mutually beneficial, as dealers are dependent on supplier product quality. The industry has significant barriers to entry due to capital intensiveness and low margins. Purchasers of construction equipment and heavy machinery vary substantially from large-scale agricultural operators to small farmers.

In an economic recession, farmers delay buying agricultural equipment, which negatively impacts manufacturers such as Rocky Mountain Dealerships. In an extreme scenario, this could lead to a Japan-like depression scenario where customers put off making large equipment purchases in the hopes that prices will reduce.

The company is well aware of this risk and has taken steps to control it. The cyclicality of the construction industry directly impacts heavy machinery purchases, but this is somewhat controlled by establishing an excellent working partnership with customers where Rocky Mountain Dealerships provides after-sales support. The construction industry is a small portion of revenues, so it does not have a material impact on the company’s earnings.

Rocky Mountain Dealerships is often the only dealer in smaller regions having created exclusive agreements with suppliers and consumers, giving it a strong economic moat. The company has a stated business strategy of organic growth via partnerships in several advantageous locations, and mergers with small family-owned dealerships having inefficient operations and below-par profitability.

The company has achieved significant success over the years and gained market share versus three primary competitors: Astec, Finning International, and Toromont Industries.

Over the past decade, Rocky Mountain Dealerships has had an average leverage ratio of 37.1%. The company has an adjusted return on invested capital (ROIC) of 9.8%, which is higher than industry peers.

From an investment perspective, the biggest advantage of Rocky Mountain Dealerships is the company’s low-cost equipment supply providing an economic moat in an industry with stable long-term earnings. The company’s top customers are quite loyal giving Rocky Mountain Dealerships the ability to earn outsized profits for several decades.

Q2 sales decreased by 33.9% to $198 million compared to last year due to the lower agricultural demand. Gross profit decreased 23.7% due to the reduced overall revenue, offset slightly by a favourable mix shift towards higher-margin after-market revenues.

Dividends have been stable at $0.1225 per share every quarter. Management continues to try to engage in mergers and acquisitions and has stated that they plan to do so in 2020. Rocky Mountain Dealerships can be a long-term capital compounder in any portfolio.

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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Nikhil Kumar has no position in any of the stocks mentioned.

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