Eaton (ETN 2.27%) traces its history to 1911. Back then it supplied parts for trucks. It still does. But it has grown massively and, frankly, looks nothing like it did a century ago. And that's the reason I've owned this industrial giant for seven-plus years, with a plan to own it for decades into the future.
Shifting with the times
Arie de Geus wrote a book called The Living Company, which came out of research he conducted into company longevity while working for Shell. Although it's a book about how to manage companies, the important takeaways for investors are that most companies are gone after 30 years or so. The ones that last beyond that often take a different approach, including a belief that the company has to do whatever it takes to remain "alive." That's not just a corporate slogan; it's an ingrained ethos that infuses a company with purpose.
Image source: Getty Images.
When you step back and think about that in the real world, you find that companies that survive for longer than 30 years have an ability to adjust so they stay relevant. A prominent example could be IBM (IBM -1.05%), which started its life selling scales and then switched to computers. And then it switched again to computer consulting. Recently, it made yet another pivot to hybrid cloud computing and artificial intelligence.
Eaton has done something similar, but in the industrial realm. It began life in the auto sector. Today, however, it generates nearly 70% of its revenue from electrical products and services. There were a lot of intermediary steps in between, but you get the idea. Eaton changed with the times and today is heavily focused on the industrial segment that it believes will lead to the most success.
That ability to change was one of the main reasons I bought Eaton while it was still working to integrate its largest acquisition ever, Cooper Industries. It wasn't going as smoothly as Wall Street wanted, leading the stock to fall and the dividend yield to rise to a historically attractive 4% or so. Despite regular annual increases, the yield today is just 1.6% today, thanks to stock price appreciation.
How's it look today?
There are two important stories today about Eaton. For starters, it has shifted from a highly cyclical business to one that's still cyclical, but far less volatile through the cycle. That's been achieved by increasing exposure to businesses that CEO Craig Arnold describes as "long cycle" or "no cycle." So the business is a more reliable performer over time. That's good, though not necessarily something I was looking for. I can handle cyclicality as long as I know a company has a strong long-term business foundation.
The more attractive story is that Eaton is positioned to benefit from what it believes is a global period of infrastructure spending, for things like chip fabs and clean energy, that will last for at least the next five to seven years. Backing that view is a collection of major government spending initiatives in the United States, Europe, and Asia. It estimates that there have been around $600 billion worth of "megaprojects" announced, which have values of $1 billion or more, since January 2021.
That's a big-picture number, and Eaton won't win every contract it bids on. But at this point, it's bidding on twice the number of projects as it was in 2019 in the North American market. Even if it generates a win rate only around its historical norm, that should lead to a drastic revenue increase. And the reason it's in this position is that it's shifted its business to focus on electrical products and services, which are the lifeblood of the modern world.
I'm not selling
To be honest, I wouldn't run out and buy Eaton stock today. Given the historically low yield, it looks a bit pricey. But I am glad I bought it when investors doubted its ability to change. I have material profit, and the dividends just keep compounding as I reinvest them. When I finally get to retirement, I'm confident that I'll have a robust quarterly payment to live off. But if it ever goes on sale again, I'll be a buyer. You might want to be one, too.
