A Once-in-a-Decade Opportunity: 1 Magnificent Dividend Stock Down 56% to Buy Right Now

Just because a business is susceptible to things it cannot control doesn't mean it's a lousy company.

I would say that applies to Pool Corp. (NASDAQ: POOL) right now. The world's largest wholesale distributor of pools and related supplies has tumbled over the past few years, sliding 56% from its high at the time of this writing.

Simply put, consumers are struggling to afford homes and big-ticket projects, which means Pool Corp.'s business has slowed following a post-pandemic boom. However, the selling has priced the stock at levels not seen in over a decade. Even Warren Buffett and Berkshire Hathaway have stepped in, buying Pool Corp. shares for their portfolio over the past year.

Below, I'll explain the value proposition Pool Corp. offers today and why investors may want to consider adding the stock to their portfolios for the long haul.

Image source: Getty Images.

The stock's dividend yield hasn't been this high in over a decade

Pool Corp. is a dividend stock with over two decades of dividend payments. The company has raised the dividend for 14 consecutive years. Often, stocks maintain their dividend yields based on how the market trades them. For instance, a company with higher earnings growth may trade at a lower yield than a mature company with little growth potential.

But what's interesting here is that Pool Corp. is currently yielding well above its historical norms. In fact, the stock's yield, now nearly 2%, hasn't been this high in over a decade. The last time it was this high, the economy was recovering from the housing and financial crisis of 2007 to 2009.

POOL Dividend Yield data by YCharts.

I wouldn't say the economy is as dire as it was back then, but the evidence is piling up that consumers are financially tapped out. It has weighed on Pool Corp.'s business, whose earnings per share (EPS) have declined from their peak a couple of years ago, and sales growth was just 1% in the third quarter of this year.

Pool Corp. is well equipped to endure the adversity

Now, one thing you'll notice in the chart above is that the stock's dividend yield was much higher in 2007 to 2009 than it is today. The yield got that high because the stock's decline was steeper than the current 56% drawdown. In other words, yes, things could get worse if the U.S. enters another full-blown economic crisis.

But there's no telling whether it will. You can only look at things as they are now and prepare for potential scenarios. In that light, Pool Corp. is well equipped in case the business climate worsens.

For instance, the stock's dividend payout ratio is still under 50% of 2025 earnings estimates. Management may choose not to increase the dividend during a recession, but the payout itself isn't financially straining the company.

Pool Corp.'s business slows during a recession because fewer people can (or want to) pay the significant upfront cost to build or install pools. Total sales could even decline. However, the business has a solid revenue base. People tend to stick to the upkeep to preserve their hefty purchase, so that revenue is much stickier. Pool Corp. generates approximately 64% of its sales from recurring maintenance and supplies.

A proven business model that compounds wealth

One thing that has been proven over the years is that Pool Corp. has an efficient, profitable business model. The company has averaged an 18.25% ROIC (return on invested capital) since going public, including the dips during recessions.

Pool Corp. operates in a fragmented market with many small, independent pool distributors. Management routinely allocates capital to acquisitions, slowly bolting on new sales growth and expanding its market share over time.

This growth blueprint has been effective, and management consistently returns earnings to shareholders through a mix of dividends and share repurchases. The result? The stock has generated total returns of more than 37,000% despite sitting over 50% off of its all-time high.

The economy goes through ups and downs, and this is clearly a tough stretch even if the broader stock market is near all-time highs. Berkshire Hathaway's diving into Pool Corp. despite aggressively selling stocks over the past couple of years is also telling.

While you can't predict when the economy will turn around, or when Pool Corp. will snap out of its slump, the stock is likely to remain a long-term winner, so consider buying it at its current discount.

Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool has a disclosure policy.