Did Sturm, Ruger & Company Just Fire A Warning Shot?

Beware Sturm, Ruger & Company’s High-Yielding Dividend 

Sturm, Ruger & Company NYSE: RGR just lowered its dividend by 21% but it may not be the warning shot it seems to be. The company pays a variable distribution based on earnings and this quarter’s payout is 40% of earnings. No, the warning shot is in the Q3 earnings report details and data from the FBI. The details of the report are good but, when coupled with the FBI’s background check data, points to declining sales in the coming year. The FBI released its monthly data a few days ago revealing background checks are down 21% from last year’s high figures and at the lowest levels of the year. If you’re interested in Sturm, Ruger & Company’s dividend be sure and buy it for the right reasons. With revenue and earnings expected to fall 16% and 28% respectively, we are expecting the payout, as safe as it is, to yield a lower rate next year than it does this year. 

Sturm, Ruger & Company Are Executing Well 

Sturm, Ruger, & Company are executing well despite the slowdown in sales and global supply chain issues. The company reported $178.2 million in net revenue which is up 22.3% from last year. The bad news is that revenue missed the Marketbeat.com consensus by 680 basis points and puts the company off-target for meeting the full-year consensus figures. On a two-year basis, the company’s sales are up 55% which is a two-edged sword. As strong as the last year has been, it will only make the comps more difficult as sales slow. The good news is that the company appears to be gaining market share as YTD sell-through to dealers is up 9% versus the 11% YTD decline in permits. 

Moving down the report, there is more good news in the form of margin. The company reported a 110 basis point increase in gross margin and 430 basis point improvement in the operating margin that combined to drive a 42% increase in GAAP earnings. The company’s $1.98 in GAAP earnings is up $0.59 from last year but, like revenue, on the decline from a peak set earlier this fiscal year. 

“Despite a moderation of overall demand as reflected in the last two-quarters of adjusted NICS, we shipped all of the firearms that we built this quarter without the need to aggressively promote or discount our products. Our finished goods inventories remain near historic lows and we have just begun to replenish the distributor and retail inventories that were largely depleted over the past eighteen months, putting us in a great position as we head into the fourth quarter, which has traditionally been a period of strong demand.

Sturm, Ruger & Company Dividend Is Safe 

The Sturm, Ruger & Company dividend may be variable but it is safe. The company’s variable dividend policy is fundamental to the fortress balance sheet, a balance sheet that carries no debt and large amounts of cash. On a shareholder equity/book value basis, the company’s value is more than 50% in cash and that is something we like to see. So, investors should expect the dividend to trend lower over the next year but, by our estimations, remain above 3.0% relative to the recent price action. 

The Technical Outlook: Sturm, Ruger & Company Pull Back To Support 

Shares of Sturm, Ruger &  Company are pulling back from a recent peak following the Q3 earnings report. The price action has been bullish over the past few months but is marked by significant resistance at the $90 level. In our view, this stock is range bound and may either move up to the top of the range near $90 or fall below the near-term trend line and move lower. If the stock moves lower we see it finding support in the range of $60 to $70.