The industrial sector has been hard hit by events in 2020, and many stocks have been sold off as a consequence. As such, there are plenty of dividend-paying stocks to choose from in the sector. In particular, industrial conglomerate 3M (MMM), package delivery company UPS (UPS), and industrial supply company MSC Industrial (MSM) are interesting for income-seeking investors. Let's take a closer look at why.
United Parcel Service
Sporting a 3.3% dividend yield, the package delivery company will attract dividend hunters as well as value investors convinced that its investments in e-commerce deliveries will ultimately pay off. In common with FedEx (FDX), UPS has been ramping up capital spending in its networks in order to support growth in e-commerce deliveries.
Investing for growth is all well and good, but it's far from clear that UPS and FedEx aren't stuck in an endless cycle of investment that will curtail free cash flow (FCF) generation. In a similar vein, business-to-consumer (B2C) e-commerce deliveries tend to be lower margin due to the extra costs involved in delivering to myriad residential addresses. As a result, there may be a long-term margin challenge for both companies.
That said, FedEx managed to generate a sequential improvement in its ground margin in its recent quarter despite seeing soaring B2C deliveries and a collapse in higher-margin business-to-business (B2B) deliveries due to the COVID-19 pandemic. Moreover, UPS was actually expecting $4.3 billion to $4.7 billion in FCF in 2020 before the pandemic hit, suggesting the company has the potential to generate significant cash flow after the pandemic stops distorting trade.
If all goes to plan, then UPS should start to demonstrate an ability to grow margin and revenue in due course.
3M Company restructures
The pandemic didn't come at a good time for the industrial conglomerate. After a few years of lackluster operational performance, 3M was under pressure to reshape the company for growth, and 2020 was supposed to be the year when the transformational initiatives started to bear fruit.
Unfortunately, the slump in the global economy has had the dual effect of hitting its sales hard and masking any underlying improvements. It's a somewhat frustrating situation for investors looking to buy the stock, but it doesn't mean that the stock still doesn't have its attractions:
- Strong ongoing FCF -- $5.4 billion in 2019 with Wall Street analysts expecting another $5.4 billion in 2020 -- which easily covers the $3.3 billion in dividends and gives financial leeway for CEO Mike Roman to restructure the company.
- Despite underwhelming performance in the healthcare and consumer segments in recent years, 3M still has a collection of world-class brands and products.
- Two major acquisitions were made in the healthcare segment in 2019 (M*Modal artificial intelligence systems and Acelity advanced wound care), and the under-performing drug delivery business has been sold in 2020.
- Management continues to restructure the company with business groupings now run on a global basis and a more focused approach on its most profitable activities.
While it's too early to point to hard evidence of an improvement in performance at 3M, the opportunity and management will are definitely in evidence. Meanwhile, investors will get a well-covered 3.7% dividend yield while they wait for improvement.
A slump in the industrial economy and a crash in energy prices (MSC distributes many products used by heavy industry customers) are not what investors in MSC Industrial were hoping for in 2020. It gets worse. The company's recent earnings presentations were full of cautionary commentary, with CEO Erik Gershwind talking of "acute weakness" in end markets, such as metalworking products for the aerospace, automotive, and oil and gas industries.
However, given the production shutdowns in the automotive and aerospace industries and the collapse in energy demand, it's hardly surprising that MSC is seeing ongoing caution from its customers. That said, the economy is slowly recovering, air travel is coming back, and cars are on the road again. Meanwhile, the price of oil has come back to above $40 a barrel. The company continues its strategy of becoming a partner of choice to its largest customers.
MSC's sales will surely recover in the future, and the company's dividend of $3 per share (currently yielding 4.6%) looks well covered by projected earnings of $4.60 a share in 2020. There are still longer-term question marks around the company's margin declines, but MSC looks to be a decent option for investors focused on yield.