4 Industrial Giants To Consider Now
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It has been a good year to be a General Electric (NYSE: GE) shareholder. Its' stock is up 21% for the year, nearly double the average increase of 12% for the S&P 500. Not only that CEO Jeffrey Immelt is looking out for shareholders as well. For the fifth time since 2010, a dividend hike was announced, along with another $10 billion allocated for share buybacks through 2015. The current yield is 3.5%. Combined with existing authority of nearly $5 billion under the old buyback plan, Immelt's stated goal of driving outstanding shares below the 10 billion shares level is obtainable.
The reason for all this largess is frankly, GE's banking unit, otherwise known as the reason why GE foundered badly late last decade. GE's purchase of about $7.5 billion of MetLife's (MET) banking assets has finally gone through, demonstrating that while the insurance giant wants little to do with the FDIC and banking industry, GE is once again embracing it, sort of and with good reason. The “sort of” is that GE really wants its finance unit to be a resource for its industrial customers, and little else. Yet, it is hard to ignore the $5.2 billion the finance unit has returned through dividends to its parent this year.
There are rumors that GE management wants to spin off the consumer arm of GE Capital in a tax free spin off to shareholders. It is ironic indeed, that GE Capital a few years ago was hemorrhaging billions of dollars, its parent was dragged down and dividend payments to the parent were absent for years. Now that GE Capital is riding high, paying billions in dividends, having a strong 10.3% capital level, and a return on assets in the third quarter of 1.20%, that GE wants to divest part of the sprawling unit. It takes a lot of discipline to “buy low and sell high”, but in this instance GE might just be pulling it off.
While this industrial giant considers downsizing its financial arm, it is devoting its considerable resources toward growing its industrial units. It is a world leader in energy generation, transportation, and medical equipment, among other things. GE's industrial revenue from the first three quarters advanced over 10% from the first nine months of 2011. And, GE has seemingly hedged against continued sluggishness in Europe by moving to cut up to $1 billion from its expense base.
I have written before that more than any company, GE is a proxy for the overall economy. Yet, I see GE outperforming the market over the next couple of years, largely as a result of its' particular business lines being relatively fast growing. I see this is a premier, long-term holding for nearly any investor.
While GE is of course the largest industrial conglomerate in this country, it is far from the only one. Another premier name in that niche is Ingersoll-Rand (NYSE: IR). Its four segments include Industrial Technologies, Climate Solutions, Security Technology and Residential Solutions. It recently announced the spinoff of the security businesses to existing shareholders, raised its dividend about 30% to an annual $0.84 per share, and has an ongoing $2 billion share repurchase program. The security units are the smallest of conglomerate and their spin off was a near certainty since activist investor Nelson Peltz was named to Ingersoll's board in August, 2012.
Looking ahead, I like this Irish giant, which gets nearly two thirds of its revenues from the United States. As the new housing market continues its recovery, Ingersoll's revenue stream will expand. But the stock is up some 60% in the past year, so I believe much of the good news is already factored into the stock price. I would skip this one unless there is a pullback below $40 per share.
Rhode Island based Textron (NYSE: TXT) has interests in aviation (Cessna and Bell Helicopters), other military systems, “EZ Go” golf carts and tools. About one third of its sales are overseas. Bell Helicopters recently withdrew from a new military helicopter bidding, leaving the Sikorski unit of United Technologies (UTX) as the only bidder left in what is up to a $6.84 billion program. Textron could really have used the sales, as its revenues struggled in the third quarter of the year on light Cessna private jet sales. Earnings in the quarter after accounting for one-time events rose by 6% from the year earlier, but missed analysts’ projections by three cents per share.
Assuming the company gets its Cessna division back on track and revenue growth reinstated, Textron offers compelling value. It is successfully bringing its debt levels down, which will help its interest expense. Its stock has risen over 40% this year, but still it only trades at a PEG of 0.39. At such a level, it offers a terrific opportunity to those willing to take some risk in return for a large potential gain over the next couple years.
3M (NYSE: MMM) operates in 65 countries through six different units. The largest of these is Industrial and Transportation, with 33% of 2011 sales, and the smallest is its communications unit with 11% of sales. In between are its Health Care, Display and Graphics, Consumer and Office, and Security and Protection. Best known to most individuals for its Scotch Tape and Post It notes, 3M markets thousands of products worldwide. There had been concerns the pace of 3M's legendary research and development had been slowing, but under new CEO Inge Thulin, the research and development budget has been increased to $1.6 to $1.8 billion in 2013, with an emphasis on monetizing the results of the spending more quickly.
3M has had a successful 2012. The stock price is up over 15% in the past twelve months, and earnings are likely to arrive at about $4.4 billion, or $6.35 per share, versus the $5.96 per share in 2011. This is despite substantial strengthening of the U.S. Dollar versus most currencies. 3M is virtually without peer as an income stock for conservative investors. Earnings are likely to grow in the low double digit range going forward, and the dividend, which has been raised every year for 53 consecutive years, shows no signs of slowing down. 3M also has a rock solid balance sheet with debt only 27% of capitalization. Further, shares outstanding have fallen from over 800 million in 1998 to about 680 million, helping support per share results. This is a winner for anyone who would like a highly diverse, relatively safe equity.
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