Three Industrial Stocks to Watch For

Shweta is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

With impasse around the US Fiscal Cliff behind us, and increasing indications that some resolution of the debt ceiling will be reached, business and investor confidence is returning. The prospects look especially good for industrials, with the Chicago PMI climbing to 51.6% in December. I have picked three of my favorite industrial stocks which I think would provide good opportunities to investors for capital gains as well as dividend growth. These companies have managed to offer a good dividend growth rate in the last five years, and I think 2013 will provide further upside to these stocks. 

<table> <tbody> <tr> <td> <p><strong>Companies</strong></p> </td> <td> <p><strong>Forward Annual Dividend Yield </strong></p> </td> <td> <p><strong>Dividend Growth (Last 5 years)</strong></p> </td> <td> <p><strong>Pay Out Ratio</strong></p> </td> </tr> <tr> <td> <p><strong>Deere & Company</strong> <span class="ticker" data-id="203294">(NYSE: <a href="">DE</a>)</span></p> </td> <td> <p>2.1%</p> </td> <td> <p>12.97%</p> </td> <td> <p>23%</p> </td> </tr> <tr> <td> <p><strong>Rockwell Automation Inc.</strong> <span class="ticker" data-id="205238">(NYSE: <a href="">ROK</a>)</span></p> </td> <td> <p>2.2%</p> </td> <td> <p>10.14%</p> </td> <td> <p>34%</p> </td> </tr> <tr> <td> <p><strong>Illinois Tool Works Inc.</strong> <span class="ticker" data-id="204092">(NYSE: <a href="">ITW</a>)</span></p> </td> <td> <p>2.5%</p> </td> <td> <p>10%</p> </td> <td> <p>30%</p> </td> </tr> </tbody> </table>

Source: Yahoo! Finance

Deere & Company – Deere is the market leader in agriculture and farming equipment, with ~37% of the global market share. The company is well-positioned to take advantage of the increasing production of soft commodities such as corn, soybean, wheat, etc. It will be further benefited from the rising crop prices which would drive the farmer's cash receipts and income. Also, with its continuous investment on R&D, the company is all set to launch its new range of innovative products in 2013, which includes utility tractors, balers, residential and commercial mowers, etc. The new line of products aims at enhancing the productivity in the field as well as reducing power requirements. I believe this continuous innovation and products expansion, along with its pricing power, will help Deere drive in more sales.

Another factor that would help Deere considerably is the growing opportunities in emerging markets. To meet the demands of ever increasing population, agriculture mechanization is being widely adopted in developing markets. The company recently opened a site with an investment of ~$250 million in China, which will include R&D and production facilities. This site will produce all of Deere's agricultural equipment models including the latest ones. This will also boost up the company's performance in the Chinese market with improved sales and revenues.

Rockwell Automation - Another stock on my list is Rockwell Automation, which provides automation, power control and information solutions to industries globally. Rockwell has a strong alliance of partners which help it develop solutions that give technical and competitive advantages to various industries. It includes some big names such as Cisco, Microsoft, Endress+Hauser, Dassault Systems, etc. The company’s fiscal year 2012 results were mainly driven by its good sales in the organic segment, which increased by ~6% in 2012. Also, the company continued to add value to its shareholders with a hike of ~11% in the quarterly dividends and buybacks.

Like Deere, this company also has its focus on the emerging markets, and last year it acquired assets of Chinese company Harbin Jiuzhou Electric Co. Ltd in an ~$83 million deal. Via this acquisition, Rockwell will now be able to design and manufacture medium-voltage drivers and power solutions for a wide range of customers in China and the whole of the Asia-Pacific region. This deal will enhance the company's presence in the motor control market in the Asia-Pacific by improving its capabilities in various product lines. With the increasing investment in the Chinese economy, I expect a huge opportunity for the company in the heavy industry markets in Asia. This would provide meaningful growth potential to Rockwell through this acquisition. I expect an average annual revenue growth of ~6.5% and earnings growth of ~7% for the company over the next five years.

Illinois Tool Works – A diversified company manufacturing various engineering products, components, and specialty systems in around 58 countries. While the other two companies are gaining out of new investment and acquisitions, Illinois Tool is focusing on divestments to boost its profitability. Earlier in its third quarter, the company announced the sale of 51% of its stake in the decorative surface business to private equity firm Clayton Dubilier & Rice. The main aim behind the deal was to simplify its business with more focus on its core segments. The cash proceeds of ~$1.05 billion from the transaction will be used by the company in its core businesses and also in share buybacks.

The company even included its divestment strategy in its five-year plan announced in the recently held annual investors meeting. It presented a framework for its key initiatives and strategies for the future. It has outlined a cost-cutting plan to reduce the unwanted costs and to increase its profits. The company has around 800 business units, and is planning to divest up to 25% and also merge the remaining units into 150 units at the end of 2017. Each of the remaining 150 units would be expected to generate average revenue of ~$100 million annually. This move will further allow the company to reposition itself to compete better in the industry.

Summing up, all the three stocks discussed above can be a great addition to an income investor's portfolio. These companies should gain from the improvement in the industrial activity as the economy recovers. Considering their future strategies towards high-growth, I recommend buying these three stocks.

ShwetaDubey has no position in any stocks mentioned. The Motley Fool recommends Illinois Tool Works. 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!

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