Looking at the 22 stocks that make it onto the GuruFocus Dividend Income Portfolio screener, one name that caught my eye was Rockwell Automation Inc. (ROK, Financial), an industrial automation company that focuses on transforming industrial supply chains for the digital era.
I'll admit, I was suprised to see a tech stock like this on the Dividend Income screener. The screener has 12 criteria, including a satisfactory dividend-paying record, good financial strength and profitability metrics, a return on capital or return on invested capital of at least 10%, an operating margin greater than 10%, profitable for at least 10 of the past 10 years, a five-year revenue growth rate of at least 5%, a dividend yield of at least 1.5%, a yield on cost above 2.3% and a dividend payout ratio of less than 70%.
Thus, I decided to take a dive into Rockwell to see if it might be a suitable income investment for tech growth investors.
About Rockwell
Rockwell Automation was founded as the Allen-Bradley Company in 1903 and acquired by Rockwell International in 1985. In 1996, it was incorporated in Delaware, and following that divested its aerospace and defense businesses to The Boeing Company (BA, Financial). In 2001, it changed its name to Rockwell Automation.
Based in Milwaukee, Wisconsin, the company has a market cap of $30.37 billion and generated trailing 12-month revenue of $7.76 billion. Rockwell operates in more than 100 countries.
In its 10-K for the fiscal year ending on Sept. 30, 2021, it reported that it operates through three operating segments:
- Intelligent Devices: Drives, motion, safety, sensing, industrial components and customized products.
- Software and Control: Control and visualization software and hardware, information software and network and security infrastructure.
- Lifecycle Services: Consulting, professional services, connected services and maintenance services.
Competition
The annual report also specified that it competes with large diversified corporations as well as smaller niche players. It names Siemens AG (SIE), ABB Ltd (ABB, Financial), Schneider Electric S.A. (SBGSF) and Emerson Electric Co (EMR, Financial) as major competitors.
It claims to have several competitive advantages, including “the breadth of our product portfolio and scope of solutions, technology differentiation, domain expertise, installed base, distribution network, quality of hardware and software products, solutions and services, global presence and price.”
The below chart shows how Rockwell has outperformed ABB and Emerson Electric over the past 10 years in terms of its stock price:
Financial metrics
The Dividend Income screener requires a financial strength rating of at least 6 out of 10 and a profitability rating of 7 out of 10. Rockwell just makes the financial strength hurdle with a 6 out of 10, and outperforms on profitability with a 9 out of 10.
With a return on invested capital of 12.14%, it easily clears that criteria. Similarly, its operating margin of 17.21% is well above the 10% hurdle.
It has been profitable every year for the past decade, and over the past five years, it has had an average revenue per share growth rate of 5.7%, more than the screener’s requirement of 5.0%.
With a business predictability ranking of 3 out of 5 stars, the company does meet the minimum requirement on that front.
The dividend
At first glance, there’s nothing special about the Rockwell dividend. Indeed, all that yellow on the below chart indicates less than average returns to shareholders, at least compared to other companies in the industrial products industry.
However, it does meet all the criteria for the Dividend Income Portfolio. Inclusion on this screener requires that the dividend not be reduced for at least 10 years. Rockwell has not reduced its dividend for 20 years, which means it has doubled the minimum duration. The following chart shows the company began paying a dividend in 1986 and has increased it every year since 2010:
Over the past 10 years, it has increased the average dividend per share payment by 9.98%. That’s a very good rate of growth, and at 1.7% its yield is near the current S&P 500 average of 1.82%.
Still, there are higher dividends available from stronger companies. After a year of falling market prices, many quality companies offer above-average dividends. A couple of other noteworthy stocks on the Dividend Income Portfolio list that I like better are Texas Instruments (TXN, Financial) and Cisco Systems (CSCO, Financial); both yield more than 2.5%.
Valuation
Judging by this 10-year price chart, Rockwell is currently undervalued based on its trendline, mainly because of a depressed market that began late last year:
The GF Value chart sees a slim margin of safety compared to the Dec. 13 closing price of $264.45.
Its price-earnings ratio is high for its industry at 33.18 versus the industry median of 20.32. Since its five-year Ebitda growth rate is a relatively weak 3.49% per year, the PEG ratio shows overvaluation.
Gurus
Rockwell is popular among the gurus, with 10 of them holding shares at the end of September 2022. The biggest three were:
- Mairs and Power (Trades, Portfolio) with 346,760 shares, representing a 0.30% stake in the company and 0.94% of the fund’s latest 13F portfolio. The firm increased its holding by 11.48% in the quarter.
- PRIMECAP Management (Trades, Portfolio) held 275,995 shares, after a reduction of 0.23% in the quarter.
- Ken Fisher (Trades, Portfolio) of Fisher Asset Management added 20.11% to increase his holding to 214,360 shares.
Institutional investors also have a large stake in Rockwell with 80.92% of shares outstanding. Insiders own another 1.18% of the company. President and CEO Blake Moret had the biggest position among insiders, owning 58,255 shares as of December 2021.
Conclusion
Rockwell Automation is a force to be reckoned with among dividend-paying stocks focusing on technology, having gone 20 straight years without a reduction in its dividend per share. It also has increased the dividend per share for 12 consecutive years, which suggests high committment to shareholders.
The problem, though, is that the yield is relatively low, and other quality companies can provide higher dividends without increasing an income investor’s risk. In the current economic environment, I don't think it's worth taking the risk on a tech stock for the dividend.
