The ebbs and flows of the broader economic cycle can result in ripple effects throughout equity markets. When interest rates are low and the economy is growing quickly, asset values tend to rise. The reverse is true when interest rates are climbing and economic growth is slowing.
Yet long-term investors know that the value of a business shouldn't drastically change just because of overall sentiment or the economy at a given moment. Rather, the objective should be to invest in companies that have what it takes to grow over a long time. And for income-oriented investors, the cherry on top is to find companies that can sustain dividend payments even during downturns.
ABB (ABBN.Y 0.97%), ManpowerGroup (MAN -0.45%), and Caterpillar (CAT 1.59%) are three companies that benefit from economic growth but also have the financial health needed to support their dividends in more challenging times. Investing in equal parts of each dividend stock produces a yield of 2.9%. Here's what makes each stock a great buy now.
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ABB is a year ahead of its margin target
Lee Samaha (ABB): European industrial giant ABB has a U.S. listing and offers investors the prospect of a 3.2% dividend yield and plenty of potential for long-term growth.
ABB has long had a collection of businesses positioned in exciting areas, not least robotics, industrial and process automation, and electrification products. All of these businesses are primed for growth in an economy that is increasingly moving toward automated factories, smart buildings and infrastructure, electric vehicles, and renewable energy.
ABB's end markets have always looked attractive, but its operational execution has underwhelmed in the past, and its earnings margin has tended to lag behind that of its peers.
Data by YCharts
That said, CEO Bjorn Rosengren took over the company in 2020 and was charged with restructuring the company for growth while improving margins. A lot has happened since then. Rosengren has operationally restructured the company and sold off noncore assets (such as its power grids business to Hitachi and power transmission business to RBC Bearings), spun off turbocharging business Accelleron, and is planning an initial public offering of its electric vehicle charging company.
The good news is it's working. In the company's recent third-quarter earnings announcement, Rosengren declared that ABB is likely to hit its operational earnings before interest, taxation, and amortization (EBITA) margin target of at least 15% a year in 2022 -- a year ahead of schedule. Moreover, its order growth of 16% in the third quarter augurs well for future growth.
That's an excellent performance for a company whose end markets rely on economic growth, so investors can expect more upside to come when the global economy picks up.
Passive income from putting people to work
Scott Levine (ManpowerGroup): While the fear of an economic downturn hasn't completely vanished from investors' minds, there's hope that things are headed in a positive direction after the Bureau of Economic Analysis reported that gross domestic product rose 2.6% in third quarter. It may not be a ringing endorsement that the economy is ready for explosive growth, but it is an encouraging sign.
For those interested in preparing their portfolio for that growth to occur -- and raking in some passive income in the meantime -- ManpowerGroup, a leader in employment services, deserves a look. Offering a 3.4% forward-yielding dividend, Manpower's stock offers income investors a conservative opportunity to collect some green from a company that helps people get work.
With the $2.72-per-share dividend it returned to investors in 2022, Manpower has hiked its dividend at an impressive compound annual growth rate of 12.2% over the past 10 years. And management hasn't put the company's financial well-being in peril to accomplish this feat; from 2012 to 2021, Manpower has averaged a conservative payout ratio of 40.2%.
It's important for prospective investors to recognize that Manpower is not singularly tied to U.S. economic growth; in fact, the company generates the lion's share of its revenue from Europe. In 2021, for example, the U.S. accounted for 13.2% of Manpower's revenue while Europe represented 67.6%. Nonetheless, the geographic diversity in Manpower's revenue -- the company operates in 75 countries and territories -- could be seen as a strength as it mitigates the risk of a downturn in an individual market. Plus, Manpower's customers are diversified by company size and industry.
Fortunately for forward-looking investors, the current gloom surrounding the economy has led to a sell-off in Manpower's stock, placing it in the bargain bin. Currently, shares of Manpower are valued at 9.6 times forward earnings, a discount to its five-year average forward earnings multiple of 13.6.
Caterpillar is putting up record results
Daniel Foelber (Caterpillar): Caterpillar stock is up over 30% in the last month as investors react to broader market optimism and digest the company's excellent Q3 report.
Caterpillar is known as an economic bellwether that provides a good leading indicator for the industrial, energy, and materials sectors due to its exposure to mining, construction, marine and rail transportation, power generation, oil and gas, agriculture, and more. Caterpillar's strong margins and booming profits indicate that its core customer base is doing well and is buying new Caterpillar machinery and equipment.
What makes Caterpillar's results particularly impressive is that the company is putting up excellent numbers despite being heavily impacted by inflation, supply chain challenges, and unfavorable currency conversions. The majority of Caterpillar's sales are from outside the U.S. and must be converted to U.S. dollars, which is a headwind considering the dollar relative to other currencies is at multidecade highs. Rising manufacturing costs are the result of a strained supply chain, labor costs, and higher raw material costs. However, Caterpillar's ability to grow sales volumes and raise prices has more than made up for these headwinds.
Caterpillar is forecasting the fourth quarter to be its best one this year. Disciplined spending from its customer base is a good sign for long-term growth. Although Caterpillar's short-term results would benefit if its customers went on a buying spree, it's arguably better if Caterpillar's customers implement regimented growth by improving their balance sheets and ensuring they can still do well in an economic downturn. Despite exhibiting caution, Caterpillar's customers are boosting order volumes and are accepting Caterpillar's higher prices.
Caterpillar is a Dividend Aristocrat with a 2.2% dividend yield, and it has paid and raised its dividend for 28 consecutive years. The company is well positioned for a downturn in the business cycle but is also a coiled spring for economic growth when the business cycle eventually shifts.
