One way a stockholder feels comfortable investing in industrials is by knowing that the company has a solid cash position after payments on debt. Here levered free cash flow plays an important role in paying for dividends and further expansion of the business.
To create the list below we researched industrial stocks that paid a dividend of at least 1% but not more than 5%. This allowed us to stay away from the riskier high yield space.
Additionally, we looked for those industrial companies that appear undervalued relative to their cash flows, indicated by high ratios of levered free cash flow/enterprise value.
Levered free cash flow is the free cash flow after deducting interest payments on outstanding debt. Enterprise value is the sum of the firm's value from all ownership sources: market cap, outstanding debt, and preferred shares. When companies have ratios of levered free cash flow/enterprise value in excess of 10%, it may indicate that the company as a whole is being undervalued.
This ratio gives us the money that the business can use to grow and pay dividends to shareholders. Any possibility of a dividend payout nowadays is looked at positively.
Our final list consisted of 6 industrial stocks.
For an interactive version of this chart, click on the image below. Analyst ratings sourced from Zacks Investment Research.
Do you think these industrial stocks look attractive? Use this list as a starting point for your own analysis.
1. ITT Corporation (NYSE:ITT): Designs, manufactures, and sells a range of engineered products, and provides related services worldwide.
- Market cap at $2.59B, most recent closing price at $28.09.
- Levered free cash flow at $215.20M vs. enterprise value at $2.06B (implies a LFCF/EV ratio at 10.45%).
- Dividend yield at 1.4%.
- ITT has recorded great gains over the last month, when compared to its closest competitors. The stock returned 8.37% since 3/4/13, better than Honeywell International Inc. (NYSE:HON) and Siemens AG (SI), which returned 6.64% and 3.64% during the same holding period.
2. MKS Instruments Inc. (NASDAQ:MKSI): Provides instruments, subsystems, and process control solutions that measure, control, power, monitor, and analyze parameters of manufacturing processes worldwide.
- Market cap at $1.42B, most recent closing price at $26.83.
- Levered free cash flow at $111.64M vs. enterprise value at $787.70M (implies a LFCF/EV ratio at 14.17%).
- Dividend yield at 2.4%.
- The company's earnings growth looks weak, with EPS growing by -63.25% over the last year. This is considerably weaker than competitors like Honeywell International Inc. (EPS growth over the last year at 57.42%) and Danaher Corp. (EPS growth over the last year at 16.59%).
3. Koninklijke Philips Electronics NV (NYSE:PHG): Engages in the healthcare, consumer lifestyle, and lighting product businesses worldwide.
- Market cap at $28.14B, most recent closing price at $29.40.
- Levered free cash flow at $3.24B vs. enterprise value at $27.93B (implies a LFCF/EV ratio at 11.6%).
- Dividend yield at 2.8%.
- The company has reported strong earnings growth over the last year, with EPS growing by 133.86%. But it has a lower than average projected earnings growth rate over the next 5 years (1.10%).
4. Sims Metal Management Limited (SMS): Operates in the metal recycling industry.
- Market cap at $2.12B, most recent closing price at $10.38.
- Levered free cash flow at $245.84M vs. enterprise value at $2.41B (implies a LFCF/EV ratio at 10.2%).
- Dividend yield at 1.6%.
- EPS fell by -371.59% over the last year. This is considerably weaker than competitors like Precision Castparts Corp. (EPS growth over the last year at 20.48%) and Reliance Steel & Aluminum Co. (EPS growth over the last year at 16.34%).
5. SPX Corporation (SPW): Provides flow technology products, test and measurement products, thermal equipment and services, and industrial products and services worldwide.
- Market cap at $3.66B, most recent closing price at $77.40.
- Levered free cash flow at $628.34M vs. enterprise value at $4.38B (implies a LFCF/EV ratio at 14.35%).
- Dividend yield at 1.3%.
- Investors take notice: SPW has returned -1.54% since 3/4/13, and is one of the worst performing stocks in its industry. Earnings growth also looks weak, with EPS growing by -154.90% over the last year.
6. Stanley Black & Decker, Inc. (NYSE:SWK): Provides hand tools, mechanical access solutions, and electronic security solutions.
- Market cap at $12.88B, most recent closing price at $79.83.
- Levered free cash flow at $1.93B vs. enterprise value at $15.88B (implies a LFCF/EV ratio at 12.15%).
- Dividend yield at 2.5%.
- SWK has recorded a solid performance over the last month, returning 3.80% since 3/4/13.
*FCF data sourced from Yahoo! Finance
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: Business relationship disclosure: Kapitall is a team of analysts. This article was written by Rebecca Lipman, one of our writers. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.