Investors looking for high-quality dividend stocks to buy should take a closer look at industrial giant Siemens AG (SIEGY, Financial). The company is an appealing investment for several reasons.
Not only is Siemens a leading brand across multiple industrial markets, but its robust order backlog means it has long-term growth potential in the years ahead. It also provides international diversification to shareholders looking to buy stocks outside the U.S.
The company also has an attractive dividend payout. As a result, Siemens is one of the top industrial dividend stocks today.
Business overview and recent events
Founded in 1847, Siemens is a German industrial manufacturer. The company generates $90 billion in annual revenue. It is a true conglomerate, with operations across multiple categories. The company’s operating segments include building technologies, energy, drive technology, industrial automation, financing, consumer products and more. The stock has a market capitalization of more than $90 billion.
Siemens has a leadership position across the categories in which it competes. This makes the company highly profitable and gives it the opportunity to capture new growth opportunities. In the most recent quarter, Siemens generated $23 billion in revenue, up 2% from the prior-year quarter. Adjusted earnings per share were roughly flat.
Perhaps the most important indicator of the company’s growth potential is its order intake and backlog, which are impressive. Last quarter, Siemens’ order intake exceeded $28 billion, a 13% increase year over year. A growing order intake is a good sign for two reasons. A strong intake should lead to accelerated revenue growth and provides a buffer against temporarily lower order inflow at some point in the future. Siemens’ total backlog exceeded $153 billion last quarter, a new all-time record.
Durable competitive advantages
Going forward, Siemens’ growth could accelerate thanks to its competitive advantages. One of the company’s most important competitive advantages is its robust industrial order intake. It typically books more business than it is capable of completing at any given time, which causes it to operate with a book-to-bill ratio (new contracts divided by total revenue) above 1.0. The book-to-bill ratio reached 1.25 in the most recent quarter. Siemens’ industrial backlog alone is sufficient to provide roughly one-and-a-half years’ worth of revenue without any new business bookings.
Siemens also has a healthy balance sheet with a manageable level of debt. The company has credit ratings of A+ from Standard & Poor’s and A1 from Moody’s. The combination of durable competitive advantages and high credit ratings will help the conglomerate navigate a recession better than many of its peers in the industrial sector.
Siemens should also perform well in the event a recession does not occur. As a global industrial, Siemens is closely tied to global economic growth. It grew earnings at a strong pace in the years after the Great Recession. Between 2009 and 2018, Siemens grew its earnings per share by 10% annually. Another factor fueling the company's future earnings per share growth is its share buyback program. Siemens launched a buyback totaling $3.5 billion through 2021, which should have a positive impact on future earnings growth.
In addition to earnings growth, Siemens is attractive to investors looking for dividends.
Growth and income in one stock
Siemens is a high-quality dividend stock. It pays a dividend that yields nearly 4%, though investors should note the company does make only one dividend payment a year. Annual dividends are typical for companies based in Germany. In addition, dividends are subject to a 26% dividend withholding tax. Still, the stock has an after-tax dividend yield of nearly 3%, which is significantly above the 2% average dividend yield of the S&P 500 Index.
In addition to income, Siemens is also an attractive value stock. Based on expected fiscal 2019 earnings per share of $4.60, the stock trades for a price-earnings ratio of just 11.6, which is a fairly low valuation for a strong brand and industry-leading company. Over the past 10 years, the stock held an average price-earnings ratio of 15, which could be considered a proper estimate of fair value for this company. Therefore, shareholders could see a boost to the stock returns if the price-earnings ratio expands from the current level.
If the valuation multiple expands to 15, total returns would be increased by roughly 5% per year. This would add to the returns produced by earnings per share growth and dividends. Shareholder returns will also be boosted by 4.5% expected earnings growth over the next five years, as well as the after-tax dividend yield of 3%. Therefore, the company’s total returns are expected to reach 12% to 13% per year over the next five years. With a high expected return, Siemens is an attractive investment for value and dividend growth investors.
Disclosure: I am not long any of the stocks mentioned in this article.
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