While the S&P 500 is down more than 23% year to date, the industrial sector has been hit especially hard in 2020. The iShares U.S. Industrials (IYJ, Financial) exchange-traded fund is down 28% so far this year. Of all the sectors, only real estate and energy have performed worse than industrials.
This decline is likely warranted given that significant portions of both the industrialized and emerging markets have seen economic activity grind to a halt as nations around the world attempt to control the spread of Covid-19. This has included shelter in place orders, school closures and business disruption.
This has led to mass selling of almost every asset class since mid-February. Added to this is the severe decline in the price of oil since Saudi Arabia initiated a price war by increasing its pumping. Demand for oil doesn’t appear to be too strong, which is often an indication of slowing global growth.
Investors with a longer time horizon should shift through the rubble and use this time to acquire shares of quality companies trading well off their 52-week highs. I find that the industrial sector is ripe with opportunities for those looking years, not days or months, down the road. By virtue of the share price decline, many of these companies offer higher-than-usual dividend yields and lower valuations.
3M
- Current yield: 4.5%
- Five-year average yield: 2.7%
3M Co. (MMM, Financial) is a global leader in several key sectors, such as industrial, health care, electronics, energy and consumer. The company manufactures everything from tapes and abrasives to protective gear, drug delivery systems and office supplies. The company has a market capitalization of $76.6 billion. For 2020, 3M has held up the best among the industrials on this list, losing slightly more than 25% year to date. The stock is 40% below its 52-week high, however, which is the largest loss of the stocks for this article.
The company has increased its dividend for the past 62 years. Its six-plus decades of dividend growth place 3M among the Dividend Kings, which are companies with at least 50 years of dividend growth. Showing how rare Dividend Kings are, there are currently just 30 companies in the entire market that meet the qualifications to join this group. Shares of 3M offer a current yield of 4.5%, which is the highest yield among names discussed here. The spread between 3M’s current yield and the five-year average yield is also the largest of the companies discussed.
Investors should receive $5.88 in dividends per share this year, while analysts see earnings of $9.20 per share for a payout ratio of 64%. While the expected payout ratio is in a relatively safe area, it is higher than the stock’s average of 55% since 2015.
3M closed the March 35 trading day at $131.54. Using analysts estimates for earnings per share, shares trade with a price-earnings ratio of 14.3. This is a sizeable discount to the stock’s five-year average price-earnings ratio of 20.8.
Caterpillar
- Current yield: 3.9%
- Five-year average yield: 3.1%
Caterpillar Inc. (CAT, Financial) is the largest manufacturer of construction and mining equipment in the world. The company also produces gas turbines, diesel-electric locomotives and diesel and natural gas engines. It has a current market capitalization of $57.6 billion. Shares of Caterpillar are down 29% for the year and more than 30% below the 52-week high.
The company has increased its dividend for 26 consecutive years, qualifying it as a Dividend Aristocrat. Joining this exclusive group is an accomplishment as there are just 64 such companies meeting the requirements for membership. Caterpillar increased its dividend 19.8% for the August 2019 payment. This was the largest dividend increase in the company’s history. For comparison purposes, the five-year average increase is 7.8%. The current yield is 80 basis points above the stock’s average yield over the last half decade.
Analysts now expect Caterpillar to earn $8.66 per share in 2020. With an annualized dividend of $4.12 per share, the company’s earnings per share payout ratio is 48%. For comparison, the average payout ratio since 2015 is 53%.
Shares closed Wednesday at $104.67, giving the stock a forward price-earnings ratio of 12.1. This compares favorably to the five-year average price-earnings ratio of 16.2.
Eaton
- Current yield: 3.9%
- Five-year average yield: 3.4%
Headquartered in Ireland, Eaton Corp. (ETN, Financial) is a diversified industrial company that offers highly engineered products for a variety of end markets, such as industrial, construction, aerospace and commercial customers. The company also produces electric power distribution equipment, hydraulic connectors and truck drivetrain systems. Eaton trades with a market capitalization of nearly $31 billion. Shares are down more than 21% for 2019. The stock is nearly 30% off of its 52-week high.
After raising its dividend 2.8% for the upcoming March 27 payment, Eaton has now grown its dividend for 11 consecutive years. The average increase over the last five years is 7.7%, so the most recent increase is far below what shareholders are accustomed to receiving. Shares have the smallest difference between the current and five-year average yield of all the stocks on this list, but Eaton still offers a yield that is significantly higher than the average yield of 2.4% for the S&P 500.
With an annualized dividend of $2.92 and expected earnings per share of $5.51 for 2020, Eaton has an earnings payout ratio of 53%. This is nearly in line with the five-year average payout ratio of 51%.
Eaton closed the most recent trading session at $74.60. Shares have a forward price-earnings ratio of 13.5, below the five-year average ratio of 14.9.
Emerson Electric
- Current yield: 4.2%
- Five-year average yield: 3.4%
Founded in the late 1800s, Emerson Electric Co. (EMR, Financial) has grown from building electric motors and fans to providing solutions for a variety of purposes. The company provides products for customers in the commercial, industrial and consumer markets. It manufactures products that help optimize production and energy efficiencies as well as control climate for residential and commercial buildings. Also found in Emerson’s portfolio are those products that protect food quality and safety. Shares are down 38% for the year and are more than 39% off of its 52-week high.
Emerson lasted raised its dividend for the Dec. 9, 2019 payment, which was a 2% increase from the previous year. This is in line with the company’s average annual increase of 2.3% over the past five years. What Emerson lacks in dividend growth, it makes up for in its dividend growth streak. The company has increased its dividend for 62 consecutive years, which qualifies it as a Dividend King. Emerson has the seventh-longest dividend growth streak in the market. Shares yield 4.2% today.
Emerson is expected to pay out $2 in dividends in 2020. Analysts expect the company to earn $3.46 per share, leading to an expected dividend payout ratio of 58%. This compares quite favorably to the 65% payout ratio that the company has averaged over the past five years.
On Wednesday, Emerson finished the trading session at $47.61. This equates to a price-earnings ratio of 13.8 when using expected earnings per share for the year. Shares have traded with a multiple of just under 20 times earnings for the last five years.
Final thoughts
The market has not been kind to the industrial sector in 2020, mostly due to the spread of the Covid-19 virus to nearly every country in the world. A softening demand for energy has also played a role in the decline in the industrial sector.
Some areas of the world, such as China, are already starting to see at least a partial return to normal life and industrial production has returned. Each of the stocks on this list has been beaten down by at least 30% since the start of the year. Thanks to this decline, each stock on this list also offers an above-average dividend yield while trading at a below-average earnings multiple.
Investors thinking long term and can tolerate volatility could do very well purchasing shares of 3M, Caterpillar, Eaton or Emerson Electric.
Disclosure: The author is long 3M.
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