So you want to invest in the electrical equipment sector and you also want a healthy dividend to go with it. In that case, here's a rundown of the leading players in the industry and which ones are of particular relevance to income-seeking investors.
Stocks with a good dividend yield
As an income investor, the first concern is whether the company pays a good dividend and if it can grow the dividend in the future. In this respect, the following nine electrical equipment stocks all pay dividend yields in excess of the current 10-year Treasury note yield.
Image source: Getty Images
A few notes on the table. First, the "dividends paid/free cash flow" column is an indicator of a company's current ability to pay its dividend based on its free cash flow -- ideally you would want a low ratio here. Return on equity (RoE) is a measure of how a company can grow earnings from shareholder equity -- a high number is good. Third, "g" represents a company's ability to grow its dividend based on RoE and its payout ratio -- a high number is good.
|
Stock |
Market Cap ($bn) |
Dividend Yield |
P=Dividends Paid/Free Cash Flow |
10 Year Return on Equity |
g=RoE*(1-P) |
|---|---|---|---|---|---|
|
General Electric Company (GE +6.76%) |
243 |
3.4% |
-1.18 |
10.3% |
N/A |
|
Emerson Electric (EMR +6.90%) |
38.2 |
3.2% |
0.50 |
22.9% |
11.4% |
|
Eaton Corporation |
34.9 |
3.1% |
0.50 |
13.6% |
6.7% |
|
ABB Ltd (ABB +2.97%) |
55.8 |
3% |
0.46 |
20.7% |
11.2% |
|
Watsco, Inc |
5.1 |
2.9% |
0.46 |
13.3% |
7.2% |
|
Hubbell Incorporated |
6.5 |
2.4% |
0.44 |
17.8% |
9.9% |
|
3M Company |
123.6 |
2.3% |
0.51 |
32.5% |
15.8% |
|
United Technologies Corporation (UTX +2.34%) |
97.6 |
2.2% |
0.85 |
21.8% |
3.2% |
|
Dover Corporation |
13 |
2.1% |
0.33 |
16.7% |
11.2% |
Data source: Company presentations. Table by author
There are four companies that stand out in this table. The first is General Electric Company and its 3.4% dividend yield. Don't worry too much about the negative "P" ratio, it's caused by a free cash outflow in 2016 related to the restructuring of the company. However, the deeper question with GE remains whether it's going to hit its earnings and cash flow targets. CEO Jeff Immelt recently appeared to back away from the target of $2 in operating EPS by 2018, and there are question marks on the prospects for its core power operations.
Emerson Electric
The industrial automation company has seen its fortunes improve in 2017, with an improvement in its oil & gas outlook leading to an increase in full-year guidance. That's good news for income investors because it helps make the company's dividend more secure, and CEO David Farr has been very vocal in assuring investors the company would maintain and grow it.
That said, a deeper analysis of Emerson Electric's statement on dividends suggest that, at a current stock price of around $59, the dividend yield isn't likely to be much above 3.4% by 2021 -- not bad for income investors, but significant dividend growth in the medium-term isn't really in the cards here.
Emerson Electric HQ. Image source: Emerson Electric
United Technologies and ABB Ltd
Both companies are legitimate candidates for dividend-seeking investors. Although the table above suggests United Technologies can't grow its dividend much in the future, the reality is the company is going through a transitional phase where its free cash flows and earnings will be depressed in the near-term.
The acts of increasing production of its geared turbofan engine, being price competitive in order to win market share with Otis elevators in China, and the shift to aerospace original equipment sales on newer aircraft programs (which will be initially lower margin) is holding back cash flow for now, but should lead to a long-term stream of earnings and cash flow in the future.
ABB is an interesting candidate for a number of reasons First, as you can see in the table above, the dividend is well covered by free cash flow, and the company's historical return on equity suggests it can grow its dividend handsomely in the future. Second, under pressure from a hedge fund group, Cevian Capital, ABB is in process of transforming its ailing power grids business.
Third, as you can see below, the stock trades at a notable discount to its peers and also offers the potential for capital appreciation -- not a bad thing, even for a dividend-focused investor.
ABB EV to Free Cash Flow (TTM) data by YCharts
The dividend picks from the electrical equipment sector
All told, Emerson Electric is a good choice for income seekers, just don't expect too much dividend growth in the near future. United Technologies is interesting, but you need to believe in the viability of its long-term plans, and ABB Ltd probably represents the value investor's dividend pick.
