How Conglomerates Can Stabilize Your Portfolio
Justin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Diversification is an important characteristic of every portfolio. With diversity comes stability. The more diversified you are, the more gains and losses you have balancing things out. The same concept can be applied at the individual stock level.
When a company's business model spans across multiple markets, it enables that company to endure hardship. If one segment of a business is struggling, sometimes the other segments will thrive, and "pick up the slack."
We can examine some of the potential benefits seen by these conglomerates. We will look at impacts in respective markets, dividend history and growth, as well as catalysts moving forward.
GE is always at work
source: Yahoo! Finance
- P/E: 17.6X
- Dividend yield: 3.1%
- Payout ratio: 52%
General Electric (NYSE: GE) is a conglomerate that touches just about every major industry. GE sells products and services touching the finance sector, healthcare, aviation, oil/gas, mining, industrial and more. GE was one of the hardest-hit companies when the financial crisis came. GE Capital acted as a noose around the company's neck, almost bankrupting it.
The dividend was cut, and the share price was pummeled as the over-leveraged financial arm of GE did its damage. The stock price has yet to fully recover and there are some hard feelings with many investors. However, the company has made a drastic turn around that is still in progress.
GE has drastically reduced its exposure to leverage from GE Capital. It has re-focused on its industrial operations to drive it moving forward. There are over $200 billion worth of orders on back order. The dividend is back, and making a comeback. It is currently at a 3.1% yield, and consumes roughly half of its cash flow.
GE had good news on its most recent earnings call. GE reported growth in all but one of its industrial segments. In addition to the $200+ billion in back orders, GE saw more growth with orders being up 4% across the entire company. GE has immense cash on hand to drive additional growth through acquisitions as well.
3M provides solutions for many
source: Yahoo! Finance
- P/E: 18.5X
- Dividend yield: 2.1%
- Payout ratio: 37.6%
3M (NYSE: MMM) is a conglomerate that has a broad range of products and services. It dabbles in government contracting, office supplies, transportation safety, industrial manufacturing, and healthcare among other sectors.
3M has long been a dividend machine. It has raised its dividend every year for the last 55 years, with the dividend consuming only one-third of 3M's cash flow. It will likely be raising the dividend for years to come. 3M also ensures you will increase your "buying power" over time, as its 10-year dividend growth rate of 6.6% is a step above inflation.
With a company as mature as 3M, you won't see a lot eye popping growth numbers. However that isn't necessarily a bad thing. 3M reported 3% revenue and earnings growth over last year. 3M is known to be "innovative" and its management expects to spur growth in developing markets via its healthcare, transportation, and industrial manufacturing segments moving forward.
As the US economy slowly improves, 3M's office supplies segment will also improve as the unemployment rate falls.
J&J: A healthcare-dominating company
source: Yahoo! Finance
- P/E: 21.0
- Dividend yield: 2.8%
- Payout ratio: 53.7%
Johnson & Johnson (NYSE: JNJ) is a healthcare conglomerate that offers products and services such as consumer drugs, pharmaceutical drugs, and medical diagnostic services and devices.
Johnson & Johnson is another company with a rich dividend tradition. With 51 years of increasing dividends, you can safely count on a "raise" when investing in Johnson & Johnson. The payout ratio is only about one-half of cash flow, meaning there is room to grow the dividend and the company at the same time. Its 10-year dividend growth rate is a sparkling 11.7%.
Johnson & Johnson's place in healthcare enables it to grow faster than one might guess. After all, healthcare is perhaps the world's fastest growing industry. It recently reported second-quarter earnings where revenue jumped 9% from last year, and earnings per share up 14% from last year. This is primarily a result of double-digit growth in emerging markets.
Johnson & Johnson is a leader in most areas it competes in. Its pharmaceutical pipeline is active and shows promise. Also, with as much cash as Johnson & Johnson generates, it is able to drive additional growth through acquisitions. A recent example of this is its acquisition of Synthes. This acquisition has given Johnson & Johnson a leading position in the world's orthopedic business.
The bottom line
Each of these companies are massive, and encompass various markets. This diversity can give you stability. With a diverse business model, these companies have stable earnings that translate into long-term success and shareholder returns through dividend growth.
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Justin Pope has no position in any stocks mentioned. The Motley Fool recommends 3M and Johnson & Johnson. The Motley Fool owns shares of General Electric Company and Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!