When investors think of dividend payers with the longest streaks of consecutive annual dividend increases, their minds may jump towards the Coca-Colas and Procter & Gambles of the world, but some of the slightly more volatile diverse engineering companies have among the most consistent dividend histories.
Three of the companies on the short list of companies that have 50+ years of dividend increases without a miss are engineering companies, and they’re included below. The other two on this list are in the 40+ year range.
3M Company (MMM)
3M, the largest company on this list in terms of revenue, is the business behind the well-known Scotch Tape brand, but the bulk of its 55,000+ products are marketed toward other businesses rather than consumers. This includes abrasives, adhesives, films for LCD screens, toll booth technology, and safety products. The dividend yield is a bit low at 2.39% but comes with the momentum of five decades of consecutive annual dividend growth.
This business is strong and I believe shareholders will do fine over the long run, but as I described in the latest 3M analysis, the sum of EPS growth and dividend yield is a bit on the lower side, which can impact long-term returns.
Emerson Electric (EMR)
Emerson Electric is positioned behind the growing fields of data centers and telecommunications. The world is becoming increasingly connected with more telecommunications infrastructure and more bandwidth, and cloud computing means a larger emphasis on servers rather than client machines, and these industries have the need for reliable power and cooling systems, reliable physical infrastructure to hold and connect the parts, etc. Emerson provides these things, and also is a global player in the industrial automation market.
With one of the more generous payout ratios on this list, Emerson currently offers investors a yield of just shy of 3% with more than five decades of consecutive dividend growth. The full Emerson analysis is here, and personally I’d wait for a pullback allowing a 3+% yield before making a buy here.
Dover Corporation (DOV)
Dover unfortunately offers the lowest yield on this list at slightly under 2% (all of these yields have been pushed lower due to the 2013 year-to-date strong bull market), but also has the longest dividend streak on this list, and as far as I’m aware has the third-longest annual dividend growth streak out of any company in the world.
The five operating segments of the company are Energy, Refrigeration and Food Equipment, Communication Components, Product Identification, and Fluids. The full analysis from a few months ago is available here.
Leggett and Platt (LEG)
LEG is the smallest company on this list but has the largest dividend yield of 3.50% and four decades of dividend growth without fail. The payout ratio appears high at first glance, but as detailed in the full analysis report, the company generates much more free cash flow than reported net income, so they’re able to pay the dividend and then pay just as much towards share buybacks or acquisitions.
The company has had quite the transformation over the last decade as it has divested considerable portions of the business to focus on its strong areas of furniture components, steel wire, shelving, and specialized engineering, and refocused itself toward the specific and admirable goal of offering total shareholder returns in the top third of the S&P 500. Its business segments are operated like a portfolio, and listed as “grow,” “core,” “fix” and “divest” to determine how much capital they’re allocated.
Illinois Tool Works (ITW)
Illinois Tool Works now has a similar business model of LEG, where it manages its business units like a portfolio, is divesting non-core units rather than focusing purely on growth, and is focusing on balanced total shareholder returns (core organic growth, acquisitions, dividends and buybacks). As described in the full ITW stock report, the company is well-known for its focus on the 80/20 rule, where it would rather limit the number of products and customers to maximize profitability than grow customers and products simply for the sake of growth.
The yield is currently 2.49%, and unlike many other businesses, its stock valuation has not soared in 2013 so it might be a good candidate to look into for dividend investors. I consider the current price to be fairly valued.
Three Notes About Engineering Companies
1) They tend to do well with acquisitions. In general, acquisitions have a reputation for being great for the acquired company but an often expensive and overpriced mistake for the acquirer. It’s sometimes referred to as “Empire Building” when a business seeks to grow itself simply for the sake of growth rather than for maximizing shareholder returns. Engineering companies, on the other hand, tend to make smart and consistent acquisitions at good prices as part of their regular growth policy. Occasionally they do a bit of streamlining and divest non-core operations and return the cash to shareholders.
2) With the exception of LEG and to some extent EMR, engineering companies tend to keep dividend payout ratios a bit on the low side. This is because as a group, they’re slightly more volatile than consumer businesses. They primarily sell their products to other businesses, so their earnings tend to be a bit more erratic during periods of economic weakness.
3) The positive aspect of their volatility is that this is one of the better industries to write puts or sell covered calls with. In many cases, you can lower your cost basis or make an annual return in the range of 8-15% by writing long-term puts or selling calls on companies in this industry. These tools are particularly useful for value investors when stock valuations are a bit on the high side.
Full Disclosure: As of this writing, I am long EMR and LEG.