Each year, we individually review all the Dividend Kings. The next in the series is MSA Safety (MSA).

MSA Safety has increased its dividend for over 50 consecutive years, including a recent 4% raise. This article will analyze the company in greater detail.

Business Overview

MSA Safety Incorporated, formerly Mine Safety Appliances, was established in 1914. Today, it develops and manufactures safety products. Customers come from a variety of industrial markets, including oil & gas, fire service, construction, mining, and the military.

Source: Investor Presentation

MSA Safety’s major products include gas and flame detection, air respirators, head protection, fall protection, air purifying respirators, and eye protection gear.

On July 1st, 2021, MSA acquired Bacharach, Inc., a leader in gas detection technologies, for $337 million.

On February 17th, 2022, MSA released Q4 and full year 2021 results for the period ending December 31st, 2021. For the quarter revenue came in at $410.3 million, a 5.7% increase compared to Q4 2020. Sales in the Americas segment were up 3.4%, while sales in the International segment increased 9.5%. Adjusted earnings equaled $66 million or $1.67 per share compared to $52 million or $1.33 per share in Q4 2022.

For the year MSA generated $1.4 billion or revenue, up 4% compared to 2020, driven by a 9% increase in core product revenue. Adjusted earnings equaled $185 million or $4.68 per share compared to $181 million or $4.60 per share.

Growth Prospects

MSA has put together a solid growth record in the past decade, growing by an average rate of 8.5% per year during the 2008 through 2019 period. Results in 2020 fell moderately, which is not unexpected given the coronavirus pandemic. However, earnings bounced back in 2021 and we anticipate further gains for 2022.

The company views the current environment as healthy, which bodes well for its future growth.

Source: Investor Presentation

MSA’s acquisition of Globe Manufacturing in 2017 boosted the company’s revenue growth profile and provided the company with an expansion into new product categories such as protective clothing for firefighters. Innovations such as the thermal imaging camera in the self-contained breathing apparatus and the company’s V-Series line of fall protection have helped as well.

In addition, the Sierra Monitor acquisition, Bristol Uniforms acquisition, Bacharach acquisition and a strong backlog cement the idea of the possibility of continued growth. Results were down in 2020, but still resilient, falling less than -7%.

Moreover, many of MSA’s products continue to be in demand in the current environment. Over the intermediate term we are assuming 6% annual growth.

Competitive Advantages & Recession Performance

MSA Safety has several competitive advantages that fuel its growth as the leader across the safety and protection products industry. It has a global reach that competitors cannot match, with roughly a third of annual sales from outside the Americas, and it can invest in growth initiatives to retain its industry leadership.

To be sure, there is some cyclicality inherent in the business – safety is always important, but budgets become squeezed in lesser times. That said, investors should be encouraged that the dividend kept increasing during recessions.

Earnings-per-share performance during the Great Recession is below:

• 2007 earnings-per-share of $1.80
• 2008 earnings-per-share of $1.96 (8.9% increase)
• 2009 earnings-per-share of $1.21 (38% decline)
• 2010 earnings-per-share of $1.05 (13% increase)

That said, the company remained highly profitable during the Great Recession. This allowed it to continue increasing its dividend each year during the recession, even when earnings declined. And, thanks to its strong brand portfolio, the company recovered quickly after 2010.

Valuation & Expected Returns

Using the current share price of ~$127 and expected earnings-per-share of $5.00 for the year, MSA stock trades for a price-to-earnings ratio of 25.4. Over the past 10 years, shares of MSA have traded hands with an average P/E ratio of about 23 times adjusted earnings. We are using this multiple as a starting place for a “fair” valuation.

However, with a current P/E ratio of 25.4 times expected earnings, this implies the possibility of a valuation headwind over the intermediate-term. Returning to our target price-to-earnings ratio by 2027 would reduce annual returns by 2.0% over this period of time.

Aside from changes in the price-to-earnings multiple, future returns will be driven by earnings growth and dividends.

We expect 6% annual earnings growth over the next five years. In addition, MSA stock has a current dividend yield of 1.5%.

Total returns could consist of the following:

• 6.0% earnings growth
• -2.0% multiple reversion
• 1.5% dividend yield

MSA is expected to return 5.5% per year through 2027. As a result, we have a hold recommendation on MSA stock, though the company’s ability to raise dividends through multiple recessions is impressive.

The company has over 50 consecutive years of dividend growth after increasing its dividend by 4% in May 2022.

Final Thoughts

MSA Safety is a strong business with competitive advantages. Moreover, the company also has a reasonable growth profile. Total return potential comes in at 5.5% per year, driven by 6% growth and a 1.5% dividend yield, offset by the possibility of a valuation headwind. Therefore, shares earn a hold rating.