August stock purchase – Industrial sector dividend stocks

I scheduled my weekly sharebuilder purchase this week and it’s back to the Industrials sector again as this is the lowest sector in my portfolio again – this is despite last month’s purchase. Here’s a roundup of the industrial sector stocks currently in my portfolio as well as some new candidates as I consider what to purchase next.

Some of the following companies haven’t changed since I reviewed them last month; so I added a couple of new company overviews into this post.

Industrial sector

The Industrial sector consists of companies involved in the production of products for building and manufacturing. The sector contains companies involved in the railroad, aerospace / defense, machinery, construction, tools and transportation among others. The sector typically follows the performance of the S&P index. The sector has taken quite a hit since last month and YTD Total Returns for this sector are 3.79%. It’s fallen from the middle of the pack last month to the second from bottom, only managing to beat the Consumer Cyclical sector’s YTD return of 0.23%.

Here’s my portfolio as of 11-August grouped by market sector. Industrials is my lowest valued sector and it is the only sector outside my +/- 10% rule. Note: the red/green arrows in the table represent above or below average weighting, not stock price gains.

My stock portfolio as of 1-August showing the Industrials sector as lowest weight, followed by Healthcare and Financial Services.
My stock portfolio as of 1-August showing the Industrials sector as lowest weight, followed by Healthcare and Financial Services.

My Industrial sector dividend stocks

I currently have positions in UPS, ADP, UNP and RTN in the Industrial sector.

United Parcel Service (UPS)

United Parcel Service (UPS) is the world’s largest freight transportation company at $93B. It operates in three segments – US Domestic Package (the largest at 62% by revenue), International Package and Supply Chain & Freight. 75% of UPS’ revenue is from the US.

In addition to effective marketing, UPS has increased its dividend for the last 5 years (they were frozen in 2009) and it is currently $0.67 for a yield of 2.6% with an ex-dividend date of 14-August for the next payment. It has been consistent in dividend increases; increasing them in February each year. Its current TTM payout ratio of 66.4% is higher than typical for the last 4 years although low earnings in 2012 forced the ratio up to 273%. The last 5 years’ annualized dividend growth from 2009 to 2014 is 8.3%.

Its P/E of 24.8 is lower than the industry average of 24 and the S&P 500 average of 18.2. Over the last ten years, the P/E value has generally been just a little higher than the S&P average; exceptions being 2007 and 2012 where low earnings caused a large spike in P/E. Its projected 5% EPS growth is 11%.

Automatic Data Products (ADP)

Automatic Data Products (ADP) manages payroll, tax filing and HR outsourcing for companies. My current paycheck is processed by them, and it was the same at my previous employer. They have two segments – Employer Services dealing with company HR and payrolls systems and Dealer Services which offers transaction processing to automobile and truck dealers and manufacturers.

ADP has increased their dividend each year for the last 39 years and routinely every December at least as far back as 2004. The dividend is currently $0.48 giving a yield of 2.4%. Its TTM Payout Ratio is currently 60%, in line with the last 4 years’ range of 56-60%. The dividend growth over the last 5 years is an annualized 7.6%.

ADP has a higher valuation than its industry with 26.2 vs 25.3 and it’s also higher than the S&P average of 18.2. Its valuation has been significantly higher than the S&P average every year since 2004 except for 2009 and this year looks to be no exception. Its projected EPS growth over the next 5 years is 10%.

Union Pacific Corp (UNP)

Union Pacific Corp (UNP) is the world’s largest railroad operator by its $90B market cap. Railways generally have a large ‘moat’ since its hard for a new company to start building railroads. They’re very efficient for cheaply moving large amounts of freight around – UNP move Agricultural, Automotive, Chemicals, Coal, Industrial products and Intermodal container traffic which includes international cargo from the West Coast.

UNP has increased its dividend every year for the last 8 years, although it is not consistent on scheduling the increases and they can come in any quarter. Its dividend of $0.46 provides a current yield of 1.8%. Payout Ratio is low and has hovered around or below the 32% mark for the last 10 years – it is currently 32.5%. Annualized Dividend growth over the last 5 years picked up steam and was 27.5%.

UNP’s P/E is slightly lower than its industry average with 19.4 compared to 20.0, and it’s higher than the S&P at 18.2. Over the last ten years, UNP’s P/E tends to be higher than the S&P except for 2013, 2009 and 2006. This year it’s been pulling away from the S&P average compared to last year. Its projected EPS growth over the next 5 years is 15%.

Raytheon (RTN)

Raytheon (RTN) is a military contractor worth $29B, although it has been branching out into space related opportunities too. It consists of 6 segments – Integrated Defense Systems, Intelligence & Information Systems, Missile Systems, Network Centric Systems, Space and Airborne Systems and Technical Services. It’s involved in a range of subjects from missile defense to cyber-security that are often in the news headlines.

RTN has increased its dividend every year for the last 10 years, currently giving $0.61 a share for a yield of 2.6%. It’s likewise a very stable and consistent dividend growth stock, with dividend increases arriving in April each year. Its low current TTM Payout Ratio of 36% is consistent with the values over the last 4 years in a range of 31-37%. Annualized dividend growth over the last 5 years is 14%.

With a P/E of 14.2, it beats its industry average of 16.9 as well as the S&P’s average of 18.2. Historically over the last 10 years, its P/E has been lower than the S&P average except for 2004 & 2006. This year, its P/E is lower than the S&P as it has been for the last 5 years. Its projected EPS growth over the next 5 years is 9.3% although short-term growth is limited by cuts to the US defense spending.

What else is there?

I have 4 stocks in this sector in my portfolio, so I’m going to look at some other dividend paying stocks to see if there is something better I could purchase instead of adding to my current positions.

My usual high level screener applies as I start from the Dividend Champions list:

  • Include only stocks from Champions, Challengers and Contenders filtered by the sector I’m interested in (Industrials – note that ADP is shown in the list as IT but as Industrials in M*)
  • Include only stocks with a dividend yield above 2%
  • Exclude ADRs and non-US companies
  • Exclude the Defense sub-industry as I already have stocks in that segment

United Technologies (UTX)

United Technologies is a $97B company which provides a diverse range of products and services to the aerospace and other industries. It operates in five divisions, Otis manufactures and maintains elevators. UTC Climate provides heating and cooling solutions as well as intruder alarm and fire control systems. The Pratt & Whitney segment supplies engines to the aviation industry and the UTC Aerospace segment provides various electronic and power systems for the aerospace industry. Finally the Sikorsky segment manufacturers commercial and military helicopters.

UTX has increased its dividend for the last 20 years. Its current dividend of $0.59 gives it a yield of 2.2% and it goes ex-dividend on 13 August. It pays dividends consistently but on a 5 quarter pattern so the next increase should be due in February next year. Its TTM payout ratio is currently 36% which is inline with its levels from the last 5 years. Annualized dividend growth over the last 5 years is 8.9%.

UTX has a current P/E ratio of 16.8, the same as the industry average of 16.9 but lower than the S&P 500 average of 18.2. The P/E ratio is generally very close to the S&P value over the last 10 years; the gap so far this year is the widest it’s been since 2009. Projected 5 year EPS growth is 11%.

Emerson Electric (EMR)

I used to work at Emerson Electric (EMR) before moving to Detroit last year. It’s a $47B company with 5 segments – Process Management, Industrial Automation, Climate Technologies, Commercial and Residential Solutions and Network Power. You may have come across the company from its InSinkErator brand.

EMR is justifiably proud of its dividend history, having increased its dividend for the last 57 years. Its shares currently give a yield of 2.7% from a dividend of $0.43 per share. It has a consistent increase pattern, raising dividends each November. The payout ratio has been increasing in the last three years but is still at a fair 47% TTM and the dividend growth over the last 5 years has been 5.4%.

Its P/E of 17.5 is lower than the industry average (19.4) and S&P Average of 18.2. The P/E has always been higher than the S&P’s average for each year since 2004 however so year it’s getting cheaper. Its projected EPS growth over the next 5 years is 9.4%

Caterpillar (CAT)

Caterpillar (CAT) is a $68B company that manufactures industrial machinery. It operates in 4 main segments – Construction Industries produces machinery for the building industry; Resource Industries manufactures equipment for natural resource exploitation as well as tunneling. Power Systems produces engines, turbines and equipment and Financial Products offers financing and insurance to dealers and customers. The company is geographically diverse with less than 40% of total revenue coming from North America in 2013.

CAT has increased its dividend for 21 years. The current dividend of $0.70 which goes ex-dividend on July-17 gives a yield of 2.4%, It has a stable pattern of dividend increases over the last 14 years, increasing dividends each July. Payout Ratio is low, and has been in the range from 20 to 30 in the last 10 years with the exception of 2009 where low income produced at 119% ratio. The current TTM payout ratio is 39.4%. Dividend growth has been 9.1% over the last 5 years.

CAT’s P/E of 18.7 is higher than the industry average 14.3 and the S&P’s 18.6. Historically the P/E has been lower than the S&P average with the exception of 2009 and 2010. Project EPS growth for the next 5 years is 12%

3M Company (MMM)

3M Company (MMM) is a $94B conglomerate that operates in 5 main segments – Industrial providing a wide range of products such as adhesives, tapes, filters, tapes and other specialty materials to industry. The Health Care segment supplies medical and surgical products to worldwide healthcare markets. The Safety & Graphics segment products protective and safety equipment as well as products for the communication and design industry. The Consumer includes products such as stationary and maintenance equipment for retail, office, home and building maintenance markets. Finally Electronics & Energy segment markets products to facilitate reliable sources of power, communication and high performance electronics.

MMM has great dividend history with 56 years of uninterrupted dividend growth. It routinely increases dividend payments in February having done so without missing a beat at least since 1998. Its dividend of $0.86 per share translates to a 2.4% yield. Payout ratio is good too, historically staying in a range from 34 %to 45% and currently residing in the middle of that range at 40%. Dividend growth has increased over the last 5 years at an annualized rate of 10.9%.

MMM has a P/E of 20.9, just below the industry average of 21 but higher than the S&P’s average of 18.6. Over the last 10 years, its P/W has typically been the same or lower than the S&P but it was higher last year and likewise in 2004, 2005 and 2008. Its projected EPS growth over the next 5 years is 11%.

Stanley Black and Decker (SWK)

Stanley Black and Decker Inc (SWK) is a $13B company that is probably most well known from its products for the DIY industry. It operates in 3 segments – the Consumer DIY segment produces hand and power tools and similar equipment for the construction and DIY markets, using brand names such as DeWalt, DustBuster, Black & Decker and Stanley. The Industrial Tools segment produces and sells tools aimed directly at industrial companies rather than home consumers. Finally the Security Systems segment produces alarm and security monitoring products as well as automatic doors and keyless entry systems.

SWK has increased its dividend for the last 46 years and its dividend of $0.50 per share yields 2.3%. It usually increases dividends in September but skipped an increase in 2011 – annual dividends still increased as a result however. Payout ratio is a reasonable 51% currently, coming down from 66.7% in 2012 and a ten-year high of 101.5% in 2010. SWK has increased its dividend by an annualized 9.0% over the last 5 years.

SWK’s P/E of 22.7 is higher than the industry average of 21.0 and the S&P’s 18.2. Since 2010 when it reached 50.8, the P/E has always been higher than the S&P; from 2004-2010 the P/E was always lower. EPS growth over the next 5 years is estimated to be 9.5%,

ABM Industries (ABM)

ABM Industries is a $1B company providing cleaning services to a wide range of industrial and commercial customers, ranging from warehouses, stadiums to airports and transportation centers. It also provides facilities with security and maintenance services, as well as providing support services to US Government properties such as military bases.

ABM is a Dividend Champion which has increased its dividend for the last 47 years. Its dividend per share of $0.62 earns a 2.4% yield. Dividend payment is steady with increases arriving in Q4; although the dividend growth is fairly low with an annualized yield of 3.6%. The TTM payout ratio is 50% and it’s been in this range for the last 7 years. This is definitely a conservative but persistent dividend growth company.

ABM’s P/E is 21.1 which is higher than its industry average of 25.3 as well as the S&P 500 average of 18.2. Historically the P/E has always been higher than the S&P average since 2004 with the exception of 2006; the P/E is at the same level above the S&P average as it has been for the last 3 years. EPS growth over the next 5 years is estimated to be 8.7%.

Honorable mentions

General Electric (GE)

General Electric is a notable company in the Industrials sector with a good dividend yiel however I’m not considering it in my screener because it only has a 4 year dividend growth history. It cut dividends from $0.31 to $0.10 in June 2009…the current dividend of $0.22 while increasing has yet to match its former payout.

What to buy?

So I’ve summarized ten stocks above, time to narrow the field.

My criteria of a 2% dividend yield eliminates UNP with its 1.8% yield. UNP will have to lower in price before I could consider it.

The remaining 9 companies have suitable dividend yield, and all exceed my criteria requiring a 3% dividend growth rate. Likewise, all companies have reasonable Payout Ratios.

An estimate of projected value in 5 year’s time based on current yield and 5 year EPS growth ranked UPS highest followed by EMR, and then RTN, CAT and 3M all in joint third.

MMM and EMR gained additional credit due to their length of dividend growth and lower payout ratios, compared to UPS – I value the lower risk more than potential higher income from UPS. To add extra diversification to my portfolio, I’ve decided to start a new position in EMR which had a higher projected value than MMM.

UPS actually scored lowest after the disqualified UNP. Despite its higher yield and average EPS growth, it was hampered by a short dividend growth history and a higher payout ratio.
SWK was next, scoring better than UPS and primarily helped by its 46 year dividend history.
UTX and RTN scored the same; UTX has the longer history and RTN potentially the higher income.

The next highest was CAT – while it has more growth than EMR, its shorter history of “only” 21 years rated it lower.

In joint third place was ABM and ADP. They both have longer growth history but fairly high payout ratios compared to the rest of the group.

It was very close between 3M and Emerson; both stocks scored higher than the others by a fair margin mostly due to their great dividend history. EMR’s current share price has dropped 11% from its all-time high in December 2013, whereas MMM is only 4% below its highest level on 24 July 2014; the lower EMR price gave it a better yield and a better score.

Here’s the outcome visually.

Yield #Yr DivGr5 P/O % Projected Stable Score Status
EMR 2.7 57 5.4 47.8 18 5 45 Buy
MMM 2.4 56 10.9 42.0 17 5 44 Buy
ADP 2.4 39 7.6 59.8 16 5 39 Buy
ABM 2.4 47 3.6 50.9 16 5 39 Buy
CAT 2.5 21 9.1 41.7 17 5 38 Buy
RTN 2.6 10 14.3 34.6 17 5 37 Buy
UTX 2.2 20 8.9 36.5 15 5 37 Buy
SWK 2.3 46 9.0 53.0 15 3 36 Buy
UPS 2.8 5 8.3 66.5 19 5 35 Buy
UNP 1.8 8 27.5 33.1 13 1 0 Hold

The score column shows the ranking I’m using and summarizes my analysis, the score is calculated from a weighting of the different criteria added together and aids me in valuing one stock over another. It tends to favor higher yields, long dividend history, low payout ratios and stable payments.

I modified the score calculation this week so the results aren’t directly comparable to previous scores; I’ve added a factor for Payout Ratio (low being good) and I’m estimating future dividend growth based solely on estimated EPS growth for the time being (i.e. assume current payout ratio it constant); previously I was considering historical dividend growth into account but I’m rethinking that calculation.

Summary

I’m not in regular contact with my former colleagues at Emerson; but I will say that the management culture has a very focused view on financial performance and goals. The former CEO of Emerson, Charles Knight, wrote a book about Emerson’s management style named Performance Without Compromise: How Emerson Consistently Achieves Winning Results although being an engineer, of course I neglected to read it!

I think is ABM an interesting company and I’ll keep that on my watchlist.

My purchases this week

So total purchases this week will be:

  • $350 Individual Stocks (EMR)

This purchase should increase my yearly dividend income by about $9 in my Sharebuilder account.

Full disclosure: I am long UPS, ADP, UNP, & RTN.
Sources: Morningstar, Finviz, Yahoo Finance. While every attempt is made for accuracy, mistakes can happen. Please conduct your own research and due diligence before making any stock purchase.

 

 

Quote of the day

There is no dignity quite so impressive, and no one independence quite so important, as living within your means.

0 thoughts on “August stock purchase – Industrial sector dividend stocks”

  1. Every addition is a good addition. Does the double DGR of MMM over EMR outweigh the .3 percent difference in yield? I wonder what your yield on cost would be after 10 years assuming the DGR remains the same?

    1. Hi DFG,
      Your points are certainly valid, and no, the higher DGR doesn’t outweigh the .3% difference based using historical growth.

      I show EMR as higher value for two reasons: I only do the value over a 5 year period which reduces effect of the higher growth rate, and I assume forward dividend growth is based on the next 5 year EPS growth estimate which is ~ 9% for EMR and ~12% for MMM. Assuming the payout ratio remains constant and the EPS growth is met then dividends could increase a similar amount.

      If I calculate future yield of EMR and MMM using the current yield and historical dividend payments, then in 10 years’ time, EMR’s yield on cost is 4.6% and MMM’s is 6.75%. Over a 5 year timeframe, MMM is at 4% and EMR is at 3.5%.

      I’m still researching ways to estimate future dividend growth better and I’d like to extend it out to a 10 year timeframe; but in the meantime I think EMR is a solid purchase.

      Thanks for stopping by and asking!

      Best wishes,
      -DL

  2. Lots of great companies and since you like EMR here maybe I should take another look at them. Been wanting to add to the position for a while but it seemed a bit expensive. Although I think it’s because the value is anchored to my original purchase. Eventually I’ll add ADP and MMM to my portfolio because both of those should be great long term holdings and they’ve already proven themselves. UNP and UPS are two other candidates to be added to my portfolio at some point as well. Thanks for the update.

    1. Hi PIP,

      EMR should be a boring, drama-free but dividend-paying stock – that’s the plan anyway! Likewise ADP and MMM.

      Yes, I agree with you about the current prices – I don’t think any of the stocks I looked at are real bargains – none of them ranked 4 stars at Morningstar for example. EMR looks cheaper based on its P/E over the last couple of years than it has been for a while and I think it’s a reasonable value at the moment

      I look forward to reading your analysis! 🙂

      Best wishes,
      -DL

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