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5 Industrial Stocks Poised for Bigger Dividends - views
BALTIMORE (Stockpickr) -- These five industrial stocks are getting ready to raise dividends – they just don’t know it yet.
Industrials have been getting a bad rap lately, as investors ramp up their anxiety over Europe and expect the worst from industrial production. But that extreme negative sentiment may be overdoing it a bit. While it’s true that industrials have to deal with cyclical businesses, it’s important to remember that industrial firms are still churning out record revenues right now. And when price and value don’t match up, heftier dividend payouts are the best way for management to reward shareholders.
All in, industrials tend to get a bad rap from retail investors. After all, industrial manufacturing isn’t as exciting as the next tech breakthrough or some hot consumer product. Even so, investors shouldn’t eschew the boring stocks in 2012. I can name more than a few times when buying boring turned out to be a good move, especially when sentiment was pointed the other way.
That’s why we’re searching out a handful of industrial names that I think are set to hike their dividend payouts in the next quarter.
For our purposes, our "crystal ball" is composed of a few factors: namely a solid balance sheet, a low payout ratio and a history of dividend hikes. While those items don't guarantee dividend announcements in the next month or two, they do dramatically increase the odds that management will hike their cash payouts, especially as investors start to get antsy about stock performance in 2012.
In other words, fundamentally solid companies realize that they need to hike returns for shareholders if they want to keep demand for their stock high. And studies show that, historically, a dividend-centric strategy from management means much bigger returns for your portfolio.
Without further ado, here's a look at five industrial stocks that could be about to increase their dividend payments in the next quarter.
Industrial conglomerate United Technologies (UTX) manufactures a strong portfolio of construction, aviation, and security products, ranging from Carrier air conditioners to Sikorsky helicopters. UTX’s diversification, particularly the inclusion of more recession resistant businesses in its model, is a big plus for investors who want exposure to industrials without the full-blown cyclical swings.
Currently, UTX pays out a quarterly 48-cent dividend. That’s a 2.6% yield at current price levels.
It’s important to remember that UTX’s businesses aren’t just focused around product sales; they also generate massive aftermarket sales for parts and consumable products that provide large recurring revenues year after year. Those revenues are sticky too. Since the elevators and jet engines that UTX makes are big ticket items, it’s not as if a customer can just replace the unit rather than buy replacement parts from United.
United Technologies, like many other industrials, operates in a capital-intense set of businesses. The manufacturing machinery that powers its factories are extremely expensive -- and so are the acquisitions that UTX has made in recent years. Still, the firm’s balance sheet is still in reasonable shape, and dividends should keep flowing for the foreseeable future thanks to strong cash flow generation.
Investors should be watching for a dividend hike in the next quarter. UTX can afford it.
As of the most recently reported quarter, United Technologies was one of Third Poitn's holdings. It also shows up on a list of 6 Companies That May Profit From Increased Gun Exports.
Illinois Tool Works
You can’t get much more diversification than at industrial equipment manufacturer Illinois Tool Works (ITW). The $27 billion firm has more than 800 individual units in 58 countries, spanning everything from food and beverage equipment to auto parts to commercial construction. Those 800 units are given enough rope to hang themselves -- and that management approach has helped generate double-digit earnings growth and net margins consistently year over year.
That decentralized management approach also ensures that individual units aren’t bogged down by a central management team that’s overwhelmed with decision-making. Acquisitions have been a critical part of ITW’s growth strategy -- and part of the reason why it has such a massive number of individual units under the corporate umbrella.
Despite the acquisition appetite at ITW, the majority of the buys are smaller in size, and as a result, the firm’s balance sheet is in solid shape. More significantly for dividend-seekers, ITW consistently generates huge cash flows. While some of that cash is allotted to acquisition targets, much of it is also spent on dividend payouts.
ITW currently pays out a 36-cent quarterly dividend, giving the firm a 2.56% yield. I’m anticipating that payout to climb in the next quarter.
ITW is one of the top holdings at Steven Cohen's SAC Capital as of the most recently reported quarter.
2012 has been a stellar year for shareholders at Ingersoll-Rand (IR): Shares of the $12 billion industrial name have rallied more than 25% since the first trading day of January. And those returns are piled onto thanks to a 16-cent quarterly dividend payout that puts IR’s yield at a modest 1.6%.
While this firm’s yield doesn’t qualify it as a core income holding, industrial investors shouldn’t ignore the momentum that IR is enjoying right now -- or the potential for that yield to rise thanks to dividend hikes.
Ingersoll-Rand manufactures a large number of well-known brands, ranging from Club Car golf carts to Schlage locks to Trane air conditioners. Like other industrial names, the aftermarket is big business for IR. The firm only generates around a quarter of sales from new equipment; the rest of its business comes from replacements and parts, operations that have substantially lower costs since customer acquisition is effectively free.
Hefty construction exposure heading into the recession of 2008 was an eye opener for management (as was the case at many industrials), and IR exited the crisis in much better financial shape than it entered it in. Cash flows have been strong in the last few years, and a relatively trim balance sheet leaves plenty of room for another dividend hike in 2012.
Cummins (CMI) manufactures diesel, hybrid, and natural gas engines, primarily for heavy trucks. The firm is a completely integrated heavy engine maker, building everything from the turbochargers to the power units and filtration systems used on its engines. That wider product net means lower costs for the engines that come out of CMI’s factories and more selling opportunities outside of the OEM market.
It may seem surprising, but Cummins has been early to embrace the green movement, building itself up to become the biggest maker of natural gas-powered engines in the world. That’s not just some sort of green lip service; in many cases, natural gas provides major economic benefits for truck operators, especially given the sustained low natgas prices that we’ve seen in the last couple of years.
The consumer business is also big for Cummins. Today, you can buy a Dodge Ram equipped with a Cummins turbo diesel engine -- an option that 80% of eligible Ram buyers opt for, largely because of the Cummins reputation as a serious truck engine. Engines for consumer trucks contribute around 10% of CMI’s revenues right now, a major piece of CMI’s business.
The firm yields only 1.65% at present, but investors should expect CMI’s 40-cent quarterly payout to increase in the next quarter; we’ll see if I’m right when the firm announces second-quarter earnings on July 31.
Cummins shows up on a list of 6 Stocks to Benefit From Truckers' Switch to Natural Gas.
Rockwell Automation (ROK) manufactures tools and controls used to increase efficiency at factories. Fittingly, the firm has been reducing its exposure to U.S. manufacturing in recent years, taking advantage of massive manufacturing expansion overseas to retool new factories in Europe and emerging markets. That widened geographic footprint should help to reduce economic swings in ROK’s revenues.
Those swings should also be reduced thanks to changes in ROK’s business. Because Rockwell’s focus is on reducing costs for customers, it has an easier sale than other firms that are trying to tack less palpable products onto factory floors. If Rockwell can justify the cost savings of its automation equipment, it should get the same -- now that management has sold off the more cyclical power systems business, that consistency should be more apparent on its income statement.
Rockwell has a long track record of returning free cash to shareholders; in the last few years, it’s averaged sending around half of all the cash it generates back to its owners. With profits eclipsing pre-recession highs, that’s good evidence for a hike to ROK’s 43-cent quarterly payout.
To see these dividend plays in action, check out the Industrial Dividend Hikes portfolio on Stockpickr.
And if you haven't already done so, join Stockpickr today to create your own dividend portfolio.
-- Written by Jonas Elmerraji in Baltimore.
At the time of publication, author had no positions in stocks mentioned.
Jonas Elmerraji, based out of Baltimore, is the editor and portfolio manager of the Rhino Stock Report, a free investment advisory that returned 15% in 2008. He is a contributor to numerous financial outlets, including Forbes and Investopedia, and has been featured in Investor's Business Daily, in Consumer's Digest and on MSNBC.com.