After bouncing back from the thankfully short 2020 pandemic-led bear market and recession, the world is again dealing with a significant business pullback that could fall into recession. This slowing economy has investors on edge, resulting in 2022's bear market.
The current bear market pulled Rockwell Automation's (ROK 0.50%) stock down along with it, with the share price down 32% year to date. But when it comes to this industrial giant, investors might want to take a step back and think about the bigger picture. The company's short-term issues likely won't affect its long-term growth potential. Let me explain.
What Rockwell Automation does
The key for Rockwell Automation is its business focus, which is, as its name implies, providing automation products and services to its customers. Like most industrial stocks its business is somewhat tied to broader economic ups and downs, but it interacts with recessions a bit differently than you might expect. Essentially, many of its customers look to cut costs by getting more done while utilizing fewer employees, i.e. increased automation. For those businesses, it's a cost-saving effort. For Rockwell, a business downturn can provide opportunity.
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Even as Rockwell Automation's stock takes a hit from investors selling indiscriminately during bear markets, its business is likely getting stronger. While the 32% stock price drop in 2022 may seem like a scary thing, it could also be a long-term opportunity for dividend investors.
Rockwell Automation is a Dividend Achiever, with over a decade of annual dividend increases under its belt. The dividend yield, meanwhile, has risen to nearly 1.9% because of the stock price drop. That yield may seem modest, but it's actually about middle of the road over the past decade, a period during which the dividend was increased at an inflation-beating 10% annualized rate. Rockwell stock might qualify as a dividend growth play, but it pays to dig into that notion a bit.
Rockwell Automation is seeing bear market growth
2022 has been a bit rough business-wise for Rockwell Automation, so some of the stock price pullback is probably justified. For example, during the fiscal third quarter, management lowered full-year sales guidance and narrowed its earnings outlook. On the surface, it is understandable that investors would be upset by that. But dig a little deeper and look at the actual numbers.
On the top line, organic sales are now expected to increase between 10.5% and 12.5%, down from a previous range of 11% to 15%. On the adjusted earnings per share front, the range was narrowed to $9.30 to $9.70 from $9.20 to $9.80. Step back and that basically means that organic sales are still expected to grow in the double-digits and earnings remain within the previously provided range. This hardly seems like something to justify a 32% stock price drop.
Interestingly, the company highlighted that supply chain issues were one of the biggest problems it faces. Essentially, it is having trouble getting the parts it needs to produce the products it sells. This is backed up by management's comment about having a record-level order backlog. Backlogs are work that it is waiting to be done, so the company's business doesn't appear to have fallen off a cliff, it just doesn't have the materials to fill all the orders it's getting.
Rockwell Automation stock is a no-brainer pick
No company is perfect, and most are dealing with issues of some kind as part of doing business these days. For example, Rockwell Automation's debt-to-equity ratio is 1.7 times, which isn't exactly a conservative number in the industrial space.
But Rockwell's focus on helping customers save money is the key thing that investors should be concentrating on as the U.S. flirts with a recession (some already contend the recession has begun). As businesses look for more ways to save, Rockwell Automation will likely be a net beneficiary, backed up by still-sizable sales growth and a big backlog. That bodes well for this dividend stock.
