Through the real-money Prosocial Portfolio I manage for Fool.com, I seek to invest in companies that produce solid returns while aiming to have a positive impact on the world. My latest stock purchase is Johnson Controls (NYSE:JCI), an industrial company that shows sustainability and profitability aren't at cross-purposes, but together make solid business sense.
Over the years, Johnson Controls has garnered quite a few accolades in corporate social responsibility. The company has made Ethisphere's list of Most Ethical Companies for nine years running. In 2014, it hit No. 12 on Corporate Responsibility Magazine's "100 Best Corporate Citizens" list. It resides at No. 73 on Newsweek's Green Rankings, and has made that list since 2009. The stock is also included in many indexes that focus on social responsibility, including the Dow Jones Sustainability Index.
Taking control (of the future)
Milwaukee-based Johnson Controls' impressive history stretches back to 1885, when Warren Johnson invented and patented a device that is such a common fixture in modern society that we often take it completely for granted: the thermostat.
Today, Johnson Controls is a diversified industrials and technology company that offers an array of products and services in building efficiency, power solutions, and automotive-interior parts. The company employs 170,000 people worldwide and serves customers in 150 countries.
Many of Johnson Controls' products help customers go green and cut costs, a perfect combination. Take its work in building efficiency, where it provides equipment and services in heating, cooling, refrigeration, and ventilation for residential and nonresidential buildings.
In one cost-saving example, Johnson Controls is working with the Hawaii Department of Transportation on new lighting, air conditioning, and ventilation in a dozen airports in Hawaii. The project will focus on both improving operations and incorporating renewable energy. This should result in a 49% decrease in energy use and $518 million in savings for the state agency over 20 years.
Johnson Controls also offers automotive products, including batteries for a wide range of vehicles, even hybrid and electric. One of its interesting contributions is its start-stop battery technology, which is now used in 20 million vehicles, including the 2015 Ford F-150. Through Johnson Controls' Absorbent Glass Mat battery technology, that truck boasts 26 mpg highway, better than any other gas-fueled pickup.
The company says use of its start-stop-technology batteries saves 381 million gallons of fuel annually and cuts greenhouse gas emissions by 3.4 million metric tons, which is the equivalent of carbon captured by 2.8 million acres of forest in the same time frame.
Auto seating doesn't sound like a hotbed of innovation, but Johnson Controls' CAMISMA seat reduces costs and results in a lighter environmental footprint. This seat uses fewer materials and therefore is 40% lighter than conventionally manufactured seats. Such changes cut carbon dioxide emissions and save fuel. But it doesn't sacrifice safety. In addition, the seat requires fewer steps in assembly, another cost-reducing benefit for customers.
Johnson Controls is also working on sustainability in its internal operations. For example, it has reduced its greenhouse gas emissions by 41% since 2002, and is attempting to reduce its water intensity and march toward near-zero waste sent to landfills.
I also like to take a peek at employee factors at companies I'm thinking about buying. Johnson Controls actively works on employee engagement (workers being a valuable, albeit intangible, asset). The company uses an annual employee engagement survey to devise action plans to increase engagement, which has resulted in about 126,000 completed action plans from 2007 to 2013, and 21,000 plans in 2014 alone. It clocked 89% employee participation in last year's survey, and received a 74% engagement score and a 74% score in leadership effectiveness.
A solid buy
It's no exciting highflier, story stock, or dirt cheap bargain play, but Johnson Controls' financial picture is perfectly respectable.
In the fiscal year ended Sept. 30, 2014, revenue increased 3.4% to $42.8 billion, with net income increasing 2.8% to $1.2 billion, or $2.12 per share. Last quarter, Johnson Controls outdid expectations, generating $507 million, or $0.76 per share, in profit.. Although quarterly revenue increased just 1%, the company reported a 15% jump in sales in China and an optimistic outlook for the rest of the year.
In addition, Johnson Controls announced a joint venture with Japan's Hitachi, which it expects will contribute $3 billion in sales next year. It will own 60% of the entity, which will pave the way for it to offer more air conditioning products by targeting Asia through Hitachi's distribution networks in China and Japan.
The company has been adjusting its business portfolio to more closely focus on core businesses. For example, for 20 years Johnson Controls has had a business segment called global workplace solutions, a solely service-based unit that manages commercial real estate. However, it plans to divest that unit; recent rumor has it in discussions to sell it to CBRE.
Johnson Controls' shares look like a decent deal for the long term. The stock trades at 12 times forward earnings, versus expectations for 14% earnings growth in fiscal 2016. Its PEG ratio is attractive at 1.18. Given its history of steady, sustainability-minded business to shore up the thesis, Johnson Controls earns a place in this portfolio.
Meanwhile, Johnson Controls offers a bonus with its forward annual dividend yield of 2.10%.
Taking the temperature of the future
More and more consumers and investors care about social responsibility these days. Johnson Controls has been ahead of the curve in the area for quite some time, having recognized the link between sustainability and good business sense. I think the future is bright for this company, and that it's a solid addition to the Prosocial Portfolio.