The 30 companies among the Dow Jones Industrials (DJINDICES:^DJI) all have a pedigree as the leaders in their respective fields, having found success among their peers. While some of those companies have used simple business models to achieve powerful returns for their shareholders, others have incorporated a wide variety of different sorts of businesses under one corporate umbrella, opting to capitalize on any profit opportunity that comes their way.
Today, let's look at four Dow companies that have put together impressively diversified enterprises with a number of discrete segments. By understanding how these companies managed to make disparate business segments work together to create overall profits, you'll be better able to evaluate up-and-coming conglomerates and whether they have what it takes to become the Dow stocks of the future.
General Electric (NYSE:GE)
The ultimate example of the conglomerate, General Electric has gone through several big transformations throughout its history. Most recently, after the financial crisis crushed its GE Capital unit, the company has returned to its industrial roots by emphasizing more classic manufacturing businesses and reining back on its finance division, and the sale of its remaining interest in NBC Universal will further help GE focus on industrial businesses.
What's most impressive about GE is the scope of industries it serves. Its renewable-energy offerings have gotten a lot of attention, but the company is a giant in the aviation, health-care, and oil and gas industries. GE has also gotten involved in energy infrastructure, and it's planning to expand into the mining equipment industry as well. All of these businesses rely on global economic growth to succeed, but the breadth of its segments protects GE from industry-specific catastrophes.
3M has a reputation for being a consumer-oriented company, but its consumer and office segment brings in less than 15% of 3M's overall revenue. Its largest business is its industrial and transportation segment, which makes a wide variety of products for the automotive, aviation, and marine markets. But you'll also find health-care, security and safety, and electronics-oriented manufacturing among the list of significant sources of sales for the conglomerate.
The company's big buyout of Ceradyne adds to 3M's scope, boosting the conglomerate's exposure to defense-related applications that the ceramics company brings to the table. With a history of innovation, 3M usually succeeds in surprising investors with the range of new products it comes out with over the long run, moving in directions few have the foresight to predict.
Johnson & Johnson (NYSE:JNJ)
J&J has a concentration in health care, but within that industry, it offers just about everything you could ask for from a health-care company. In an environment in which most health-care companies are narrowing their scope and spinning off or selling off non-core businesses, J&J maintains its three-part business model of consumer products such as Band-Aids, pharmaceuticals, and medical devices. Contrary to popular belief, the consumer space is the least important of the three, with medical devices bringing in the most revenue and pharma being the most profitable.
Johnson & Johnson has struggled for years to overcome problems such as high-profile product recalls, and in its most recent earnings report, J&J made an overture toward breaking up its conglomerate by mentioning the possibility of spinning off its diagnostics unit. But to preserve its AAA bond rating, sticking together may be Johnson & Johnson's best chance to remain a leader in the industry.
Last, Disney has gone well beyond its theme-park and movie roots to become a diversified media giant. With TV networks ABC and ESPN as well as a host of other cable networks, its namesake movie studio, its toy and consumer products division, and its international resorts, Disney continually seeks to grow.
Disney's scope has given it the ability to make huge acquisitions, with buyouts of Pixar, Marvel, and most recently Lucasfilm having huge implications for its revenue-generating power across its platform of media offerings. As long as people want to be entertained, Disney will be in the driver's seat to do the entertaining.
Go for diversification
The lesson from these four winning Dow stocks is that sometimes, mixing different types of businesses in a single company can be a smart strategy. Not every well-diversified company will succeed, but those that do can bring big profits for their long-term investors.