Introduction to the Industrial Sector
The Industrial sector is primarily comprised of companies that produce goods used in construction and manufacturing. Some of the key subsectors include aerospace and defense, construction and engineering, building products and industrial conglomerates. For the most part, these are capital-intensive industries that often operate on low or even razor thin net margins. Consequently, profitability can be very erratic from one year to the next. Therefore, although there are exceptions, finding quality buy-and-hold dividend growth stocks in this sector is tricky.
Moreover, companies in this sector tend to be very sensitive to the general state of the economy. For example, residential, commercial and industrial construction tends to weaken during recessionary periods. Consequently, there are many companies in this industry that are cyclical, or perhaps more precisely stated, have very inconsistent, unpredictable and erratic earnings histories.
Therefore, as I reviewed this industry I also saw similar patterns in many industrial companies’ long-term dividend records. In other words, during periods of weak earnings, the dividends paid by companies within this sector are often cut. Consequently, prospective investors seeking opportunities in this sector need to be very discerning. In spite of what I just wrote, there are a lot of high-quality names that are currently in value to be found.
The Industrial Sector
This is the fourth in a series of articles designed to find value in today’s stock market environment. However, it is the third of 10 articles covering the 10 major general sectors. In my first article I laid the foundation that represents the two primary underlying ideas supporting the need to publish such a treatise. First and foremost, that it is not a stock market; rather it is a market of stocks. Second, that regardless of the level of the general market, there will always be overvalued, undervalued and fairly valued individual stocks to be found.
My first article was titled “Searching For Value Sector By Sector”, Part 2 of 10: Energy, and will befound here. My third article was titled “Finding Value In The Materials Sector Is A Material Thing.” As a refresher, my focus in this and all subsequent articles will be on identifying fairly valued dividend growth stocks within each of the 10 general sectors that can be utilized to fund and support retirement portfolios. Therefore, when I am finished, the individual investor interested in designing their own retirement portfolio should find an ample number of selections to properly diversify a dividend growth portfolio with.
With the above second notion in mind, this article will look for undervalued and fairly valued individual companies within the general sector 20-Industrials. Within this general sector, there are several subsectors which I list as follows:
My Selection Methodology
Before I go any further, an important disclosure is in order. I will produce a list of companies in this article (and all subsequent articles), that are names that I have hand-selected from a much larger universe. My selections were made by reviewing the individual earnings and price correlated F.A.S.T. Graphs™ on all appropriate companies that I identified within the sector. Some might say my method of identifying them was not very scientific, but I would counter that it was very thorough and comprehensive. On the other hand, I will admit to it being somewhat arbitrary and based on my own judgments.
Here is the basic method that I utilized. In order to find undervalued or fairly valued companies within the Industrial sector, I utilized the assistance of the F.A.S.T. Graphs™ screening tool in the following manner. First, I asked the screener to only look for companies within the sector 20-Industrials. Then I asked to search for any company within the sector that had a current dividend yield of 2% or better. Finally, I included ADRs and all companies listed on the Canadian stock exchanges.
This produced a gross list of 157 individual companies. Then I created a personal portfolio comprised of these 157 individual companies and sorted them in alphabetical order. Next, I reviewed the individual graphs of each company and either rejected it or added it to my final lists of potential candidates based on whether or not I felt it had an adequate history and a reasonable level of consistency within that history. But most importantly, I looked for companies that I felt were reasonably valued, or close to it, today based on current earnings and expected future earnings growth. Then I broke my refined lists into two categories:
1. Conservative Growth and Income – 38 companies made this list.
2. Aggressive Growth and Income – 37 companies made this list
Before I present each of these lists, and featured selections from each, it’s important that the reader understands that these are prescreened lists of potential candidates prior to the necessary morecomprehensive research effort. In other words, I am not recommending any of these stocks for current investment. Instead, I am recommending them as companies with historical records that appear reasonably valued, and therefore, worthy of investing the time and effort to take a closer look at. This presented a challenge in finding aggressive candidates within the Industrial sector because of the cyclical nature of many of its constituents.
The Industrials Sector: A Propensity for Erratic and Unpredictable Operating Records
Before I present my list of companies in the Industrial sector that I felt were worthy of future research, I thought it might prove useful to present a few examples of companies that were cut or excluded. Keeping in mind that this is a series of articles looking for high-quality dividend growth stocks amongst the 10 primary sectors, a consistent and growing dividend was a major requirement for inclusion in my lists.
Since a picture is worth 1000 words I will again turn to F.A.S.T. Graphs™ and present the following two graphic examples of reasonably well-known companies in the Industrial sector with spotty operating histories and dividend records. For those not familiar with these earnings and price correlated graphs, I suggest focusing on two of the lines that the graphs reveal. The first is the orange earnings justified valuation line. Note that in both of these examples the lines depict erratic historical earnings results that go beyond being merely referred to as cyclical.
The second important line as it relates to this article is the pink line which plots dividends per share. Notice how both companies have historical records of cutting their dividends. Since dividend growth investors are typically interested in a consistent and increasing dividend income stream, these were the types of companies that were easily excluded. However, and in fairness to the companies depicted, it is certainly possible that their future records could be better than the past. However, since limited time is a hallmark of most dividend growth investors, they must be selective as to where they spend it.
Briggs & Stratton Corporation (NYSE:BGG)
Chicago Rivet & Machine Co. (NYSE:CVR)
Aggressive Industrial Prospects
My list of aggressive Industrial dividend growth prospects are not offered for the faint of heart. Many of these selections are very small, and some have very short records of paying dividends. Nevertheless, I felt that there are some very interesting potential candidates within this group. The reader should keep in mind that this is a prescreened list that has not been extensively researched, and therefore, is offered only as depicting prospects for a deeper due diligence effort.
