Acme United Increases Cash Dividend in Light of Excellent Outlook

Acme United (ACU – $16.99), an innovative supplier of cutting devices, measuring instruments, and first aid products, increased its quarterly cash dividend from 9 to 10 cents. This is Acme United’s ninth dividend increase since 2004.

The 11% dividend increase was justified as the Company is headed for another sales and earnings record in 2015. It’s generating lots of cash and is expected to continue to do so in coming years.

Many new products have recently been, or will shortly be, released. Moreover, margins are expected to increase, and thanks to a couple of events, Acme’s operating leverage will improve as well.

New Business

During the first nine months of fiscal year 2015, ended September 30, 2015, Acme United generated $86.7 million in sales and $4.35 million in net earnings. For the full year, the Company expects revenues of about $115 million and earnings of approximately $5.08 million. If these numbers are reached, Acme will set a new all time sales and earnings record.

For 2016, management expects sales to reach between $120 million and $123 million. An increase of between $5 and $8 million compared with 2015. Note that this is all organic growth and no acquisition has been taken into account. Acme continues to actively search for a takeover target, preferably in Canada or Europe.

Several new products will contribute to the expected organic growth. For example, a few months ago Office Depot/Office Max decided to consolidate their entire scissors business in North America. Acme won that account. First shipments have already occurred, but the full impact should be seen as of the current quarter.

In addition, the Cuda fishing tools brand has launched an entire line for fresh water fishing. The market for fresh water tools is about three times larger compared with the salt water market. And there are also a number of new first aid, hunting, and office product tools that will be launched in the following quarters.

Margin Growth

China’s central bank shocked markets back in August when it devalued its currency, the yuan, by about three percent in an attempt to boost exports.

For Acme United this has a positive effect, as about 60% of its products are sourced in China. Acme pays for those goods in Chinese yuan. And because of the devaluation, the same US dollar amount now buys more product.

As a majority of Acme’s products are sold domestically, selling prices won’t be impacted by the Chinese devaluation. As a result, the Company’s margins will improve on most products that are sourced in China.

Operating Leverage Increase

Before Acme United acquired First Aid Only in June 2014, it already owned two first aid brands, Pac-Kit and PhysiciansCare. Thanks to the combination of the three brands, the Company increased its volumes, and as such was able to negotiate more favorable sourcing prices for bandages, tapes, pads, etc., with its suppliers.

Now the consolidation of the three brands has entered its final stage as the production of Pac-Kit has moved from Norwalk, CT to the Company’s First Aid Only facilities in Vancouver, Washington. As such, the lease on the current Pac-Kit manufacturing plant won’t be renewed at the end of the year. In addition, other fixed costs, such as heat and electricity, will also be eliminated.

The benefits of the combined purchasing power and the closure of the Pac-Kit facility, will lead to cost savings of up to $1 million in 2016 and beyond. These savings will go straight to Acme’s bottom line.

Conclusion

Even without an acquisition, Acme’s sales, earnings and cash flow are expected to increase firmly in 2016.

Many new products are entering the markets, and many of them do so at higher margins thanks to the devaluation of the Chinese yuan.

The full integration of the three first aid brands will start to have a bigger impact on Acme’s bottom line in the coming quarters, as $1 million in cost savings is expected.

And finally, Acme United’s growth story is supported by a 10 cents quarterly dividend, which at today’s share price is equivalent to an annual yield of 2.35%. This is substantially higher than the interest rate on a regular savings account and even higher than the yield on a 10-year treasury bond.

The next dividend is payable on January 28, 2016 to stockholders of record on the close of business on January 7, 2016. Consider adding shares to your position. Buy recommendation.

Smallcaps.us Advice: BuyPrice Target: $53.75Latest Company Report (pdf)
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