Wednesday 22 November 2017

Non-stop dividend payer Snap-On can handle switch to electric cars

 

Nick Pinchuk, chairman and chief executive officer of Snap-On, introduces US President Donald Trump during an event at Snap-On Tools’ headquarters in Kenosha, Wisconsin, earlier this year. Photo: Bloomberg
Nick Pinchuk, chairman and chief executive officer of Snap-On, introduces US President Donald Trump during an event at Snap-On Tools’ headquarters in Kenosha, Wisconsin, earlier this year. Photo: Bloomberg

Aidan Donnelly

Picture the scene - you are in the mechanic's garage or car dealership service area waiting to pick up your car. All around the workshop are large, impressive-looking cabinets in high-gloss bright-red or jet-black paint - they have multiple drawers containing a myriad of shiny tools, each with its own particular place. Finally you see that the front panel bears the manufacturer's name - 'Snap-On'. '

When you meet the CEO of Snap-On, Nick Pinchuk, you can't help but be drawn in by his passion for the company. He will tell you that for the longest time, the company has had substantial strengths in the form of a great brand, an extensive product line that solves problems like no other, and a legion of loyal customers.

But how did it all begin? In 1920, the US car industry was a fledgling one where nobody knew what a mechanic was going to do or what type of tools he was going to need. A couple of engineers from Milwaukee came together and said they could make things easier for mechanics - and consolidate the tools they use. Their idea was to take five handles of different shapes and sizes and combine them with 10 sockets of different dimensions and fashion them so that they 'snap-on' interchangeably. It changed tool sets all over the country.

People still see Snap-On as a hand tool company, and it is - however, it is more than this as it supplies a range of power tools, tool boxes and diagnostic equipment to a growing number of industries. The company has 4,900 franchisees globally going around in vans selling tools directly to the mechanics. But it also sells directly and through distributors. Nowadays, over a quarter of its sales are outside the vehicle repair industry to areas such as the military, aviation, oil and gas, education, mining, and power generation.

The average age of the vehicle fleet in the US has been steadily increasing - and older cars need more repairs. While some may think newer cars are more reliable, they also require more complex solutions when they break down. This has resulted in significant growth in diagnostic equipment sales for Snap-On - if you don't know what's wrong with the car, how can you fix it?

Car engine bays are also changing in terms of geometry and access and therefore mechanics need different tools to solve the same old problems. People might point to the growth of electric cars that have no engine and wonder about the future requirement for hand tools. While electric cars may have fewer moving parts than traditional cars, they still have lots of moving parts and the addition of high-voltage electricity means you can't just go poking around with any old metal spanner!

Snap-On prides itself on the precision of its tools that will allow mechanics do jobs repeatedly and reliably. Investors can also experience this ethos of reliability. The company has paid a dividend every quarter since 1939 and it has never reduced it. This is probably one of the longest records around of growing, uninterrupted dividends among US companies.

In the future, the growth for the company will come from expanding its offering to serve other critical industries beyond auto repair, as well as tapping into the significant opportunities in the emerging markets. But it won't be forgetting its roots as it seeks to enhance the productivity of its van channel calling on garages and dealerships around the world.

Aidan Donnelly is head of equities in Davy Private Clients. For disclosures, visit www.davy.ie/AidanDonnelly

Sunday Indo Business

Promoted Links

Promoted Links

Business Newsletter

Read the leading stories from the world of Business.

Also in Business