I totally forgot about Columbus Day this week. Not that it affected me as I still had to work, but it messes with the Sharebuilder automatic trading calendar and the holiday requires that you set the trade a day earlier on Friday instead of the usual Monday. Which of course I didn’t.
So a slight change in plans this week. I wanted to take advantage of the recent stock market drop too so I’m going to make my next purchase in my standard brokerage account at Vanguard which has a $7 commission. Because of the commission, I’m going to invest a little more ($700) this week and reduce the amount I’d otherwise put into Vanguard’s mutual funds by $400 to compensate.
This week it’s the Industrials sector as this is the lowest sector in my portfolio again. I last bought stocks in this sector in August. Here’s a roundup of the industrial sector stocks currently in my portfolio as well as some other stocks in my watchlist as I consider what to purchase next.
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 YTD performance is unchanged from August according to Morningstar and YTD Total Returns for this sector are 3.79%, only managing to beat the Consumer Cyclical sector’s YTD return of 0.23%.
Here’s my portfolio as of 13-October 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 Industrial sector dividend stocks
I currently have positions in UPS, ADP, UNP, EMR and RTN in the Industrial sector.
United Parcel Service (UPS)
United Parcel Service (UPS) is the world’s largest freight transportation company at $86B. 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 2.8%. It has been consistent in dividend increases; increasing them in February each year. Its current TTM payout ratio of 67.8% 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 24.7 is lower than the industry average of 23.6 and the S&P 500 average of 18.4. 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-year 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 finalized their split into two companies this month (ADP for Payroll and CDK for Dealer Services) and I picked up a small quantity (1.6) of shares in CDK as a result which I’ve not included in my portfolio yet.
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 2.7%. Its TTM Payout Ratio is currently 54%, in line with the last 4 years’ range of 56-60%. The dividend growth over the last 5 years is an annualized 7.6% although the dividend may drop in the future now that the company is smaller.
ADP has a higher valuation than its industry with 23.4 vs 24.1 and it’s also higher than the S&P average of 18.4. 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 11%.
Union Pacific Corp (UNP)
Union Pacific Corp (UNP) is the world’s largest railroad operator by its $88B 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 1.9%. Payout Ratio is low and has hovered around or below the 32% mark for the last 10 years – it is currently 35%. Annualized Dividend growth over the last 5 years picked up steam (no pun intended) and was 27.5%.
UNP’s P/E is slightly higher than its industry average with 19.8 compared to 19.6, and it’s higher than the S&P at 18.4. 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 13%, down from the previous estimate of 15%.
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 35% 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 14.6, it beats its industry average of 16.9 as well as the S&P’s average of 18.4. 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 13.3% (up from the last report’s 11.3%).
Emerson Electric (EMR)
I used to work at Emerson Electric (EMR) before moving to Detroit last year. It’s a $40B 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 2.9% 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 48% and the dividend growth over the last 5 years has been 5.4%.
Its P/E of 16.6 is lower than the industry average (18.1) and S&P Average of 18.4. 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 largely unchanged from my last report at 9.2%
What else is there?
I have 5 stocks in this sector in my portfolio, so I’m not terribly interested in adding to another position. You might be though, so here are some other companies that are in my watchlist.
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 $90B 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 2.4%. 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 37% 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 15.9, the same as the industry average of 16.9 but lower than the S&P 500 average of 18.4. 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 11.3%.
Caterpillar (CAT) is a $57B 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 2.8%, 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 payout ratio is 41%. Dividend growth has been 9.1% over the last 5 years.
CAT’s P/E of 15.5 is higher than the industry average 12.6 but lower than the S&P’s 18.4. Historically the P/E has been lower than the S&P average with the exception of 2009 and 2010. Projected EPS growth for the next 5 years is 12.8%
3M Company (MMM)
3M Company (MMM) is an $86B 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 2.6% yield. Payout ratio is good too, historically staying in a range from 34 %to 45% and currently residing at the upper end of that range with 45%. Dividend growth has increased over the last 5 years at an annualized rate of 10.9%.
MMM has a P/E of 18.9, above both the industry average of 18.1 and the S&P’s average of 18.4. Over the last 10 years, its P/E 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 12%.
Stanley Black and Decker (SWK)
Stanley Black and Decker Inc (SWK) is a $12B 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 2.5%. 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 53% 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 20.9 is higher than the industry average of 19.6 and the S&P’s 18.4. 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 9.6%,
ABM Industries (ABM)
ABM Industries is a $1.4B 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 2.5% 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 48% 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 19.9 which is lower than its industry average of 24.1 but higher than the S&P 500 average of 18.4. 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 8.0%.
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 1.9% 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 CAT highest followed by EMR and UPS in joint second place then MMM, ADP and RTN 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.
Putting all the factors together
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.
CAT and ADP both overtook ABM this time due to higher projected income from growth and current yield. CAT in particular has a higher dividend yield because its stock price has dropped relatively more than ABM’s.
The top two remained 3M and Emerson, the same result from August; 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 16% from its all-time high in December 2013, whereas MMM is now 10% below its highest level on 24 July 2014; the lower EMR price gives it a better yield and a better score.
Here’s the outcome visually.
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.
I’ve decided to add to my position in EMR again this month; the 2.9% yield is a pretty good bargain and I’ll take it! I think the current drop in price is due to general market selling and not a reflection of the company’s performance.
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!
My purchases this week
So total purchases this week will be:
- $700 Individual Stocks (EMR)
- $300 VHDYX
This purchase should increase my yearly dividend income by about $29. I couldn’t resist feeding my VHDYX addiction because of the lower price so I drew into a little of the cash reserves from my house sale that I’ve put aside for investing.
Full disclosure: I am long UPS, ADP, UNP, EMR & 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.
Previous purchase – Communication sector stocks
Quote of the day
Necessity never made a good bargain.