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This article is meant to look at the 20 year history of Rockwell International and gleam any investing lessons that may be useful. It is not intended to be forward-looking for any of the companies in this article.

Rockwell International was an old conglomerate of a by-gone era. According to Wikipedia:

"Rockwell International was a major American manufacturing conglomerate in the latter half of the 20th century, involved in aircraft, the space industry, both defense-oriented and commercial electronics, automotive and truck components, printing presses, valves and meters, and industrial automation. It was the ultimate incarnation of a series of companies founded by Willard Rockwell. At its peak in the 1990s, Rockwell International was No. 27 on the Fortune 500 list, with assets of over $8 billion and sales of $27 billion."

January 1993

Let's imagine strapping ourselves into the investor seat of Rockwell back in 1993. You've actually been an investor in Rockwell since 1987 and you've seen your original 83 shares go from $23/share to $29/share currently. With dividends reinvested, you now have 100 shares worth $2900. You're trying to decide what to do with your shares. Should you keep them or trade them in?

As the Cold War has just ended, government space and defense spending has plummeted (Rockwell helped produce the space shuttle and the B-1 bomber). But you know your conglomerate has many different business units and maybe this company will even be involved in the PC age in some form or another. You look at 1992's earnings report and see EPS of $1.09 and a dividend of $0.92. You're thinking that payout ratio seems a little large. But the country just came out of the S&L crisis and early 90's recession, so maybe the earnings are a bit depressed.

You decide to hang on to Rockwell and also keep those dividends reinvested. You're a long-term investor and you plan to hold forever.

October 1996

Last year, Rockwell had EPS of $2.27/share and paid out a dividend of $1.08. Things seem to be looking good for you. You believe you were right about the recession-related earnings depression. Although the dividend has only increased 17% over the last 4 years, the EPS has doubled. You now have 110 shares worth $5940 and reinvesting $118/year in dividends. You are riding high.

You open up the paper and see that Boeing (BA) is buying your space and defense unit and you will receive 9 shares of Boeing in the deal. Not bad, you say to yourself. (Boeing would later buy McDonald Douglas in December of 1996) Although it's a small amount of Boeing stock, it may come in handy. You receive 9 shares of Boeing.

March 1997

You open up the paper and see that Rockwell is planning to spin off its automotive unit and call it Meritor Automotive (MTOR). You're unsure on whether spin-offs are good or not. You saw that in 1996, Rockwell increased their EPS to $2.55 and paid out $1.16 in dividends. You're see that you will receive 1 share of Meritor for every 3 shares of Rockwell that you own. Rockwell also says:

Upon the spin-off of Meritor on September 30, 1997, the Company's annual $1.16 per share dividend was set at $1.02 for Rockwell and 14 cents for Meritor.

You agree with management that it's the prudent thing to do. You decide to stay the course.

September 1997

For your 111 shares of Rockwell, you receive 37 shares of Meritor.

June 1998

You open up the paper and see this little news story:

ROCKWELL TO SPIN-OFF SEMICONDUCTOR UNIT TO SHAREHOLDERS; TAKE $625 MILLION SPECIAL CHARGE FOR RESTRUCTURING TO IMPROVE COMPETITIVENESS; ELIMINATE 3,800 JOBS.

Nobody likes to see "restructuring charges." You call your broker and see that your 112 shares are worth $4480. You're trying to decide what to do. You think maybe the semiconductor division was the one that caused the problem.

December 1998

For your 112 shares of Rockwell, you receive 56 shares of Conexant (CNXT) (the semiconductor division).

What's left of Rockwell? You're down to 2 divisions. There is a manufacturing automation division and an avionics & communications division.

November 2000

You open up the annual report and see that your company has been busy:

During 2000, the Automation segment acquired Entek IRD International Corporation, a provider of machinery condition monitoring solutions, and acquired substantially all the assets and assumed certain liabilities of Systems Modeling Corporation, a software developer. The Avionics & Communications segment acquired substantially all of the assets and assumed substantially all of the liabilities of Sony Trans Com Inc., a producer of in-flight entertainment systems for commercial aircraft. The total cost of these acquisitions was $193 million.

During 1999, the Automation segment acquired Anorad Corporation, U.K.-based EJA Engineering Ltd., substantially all of the assets of Enterprise Technology Group, Inc., a software business, and certain assets, principally intellectual property, of Vancouver-based Dynapro. The Avionics & Communications segment acquired Intertrade Limited and the remaining 50 percent interest in Flight Dynamics. The total cost of these acquisitions was $241 million.

In the 2000 annual report, you also see that EPS has improved to $3.35/share, while the dividend has remained frozen at $1.02/share. You decide it's probably due to all the acquisitions over the last 2 years.

December 2000

Another big Rockwell news story:

The Company announced its intention to spin-off its Rockwell Collins (COL) avionics and communications business unit into a separately traded, publicly held company.

You decide this company has no clue what it's doing. At least GE could hold itself together.

June 2001

You receive 1 share of Rockwell Collins for every 1 share of Rockwell International that you own. Rockwell International also changed its name to Rockwell Automation (ROK). At this point, I thought a table might be helpful to tell you what you own.

January 1993

Company

Shares

Price/Share

Total Price

Div/Share

Div/Year

Rockwell Int.

100

$29

$2900

$0.92

$92.00

Total:

$2900

$92.00

June 2001 (without reinvestment)

Company

Shares

Price/Share

Total Price

Div/Share

Div/Year

Rockwell Automation

100

$16.5

$1650

$0.66

$66.00

Rockwell Collins

100

$20

$2000

$0.36

$36.00

Boeing

8

$55

$440

$0.56

$4.48

Meritor

33

$15

$495

$0.76

$25.08

Conexant

100 (after stock split)

$2.40 (acquired in 2011)

$240

$0.00

$0.00

Total:

$4825

$131.56

June 2001 (with reinvestment of Rockwell International)

Company

Shares

Price/Share

Total Price

Div/Share

Div/Year

Rockwell Automation

120

$16.5

$1980

$0.66

$79.20

Rockwell Collins

120

$20

$2400

$0.36

$43.20

Boeing

9

$55

$495

$0.56

$4.48

Meritor

37

$15

$555

$0.76

$25.08

Conexant

112 (after stock split)

$2.40 (acquired in 2011)

$269

$0.00

$0.00

Total:

$5699

$151.96

It's a good thing you reinvested those dividends over those years! (My apologies for not being able to find stock prices for Conexant) Over the 8 years, Rockwell returned 6.5%/year without reinvesting dividends and 8.8% per year with reinvesting dividends.

Now at this point, you decide to keep only the two Rockwell's and throw away the others (For simplification). You continue to reinvest your dividends into each Rockwell company to this very day (10-30-2013). What did you end up with?

January 1993

Company

Shares

Price/Share

Total Price

Div/Share

Div/Year

Rockwell Int.

100

$29

$2900

$0.92

$92.00

Total:

$2900

$92.00

June 2001 (without reinvestment)

Company

Shares

Price/Share

Total Price

Div/Share

Div/Year

Rockwell Automation

100

$16.5

$1650

$0.66

$66.00

Rockwell Collins

100

$20

$2000

$0.36

$36.00

Total:

$3650

$99.00

June 2001 (with reinvestment of Rockwell International)

Company

Shares

Price/Share

Total Price

Div/Share

Div/Year

Rockwell Automation

120

$16.5

$1980

$0.66

$79.20

Rockwell Collins

120

$20

$2400

$0.36

$43.20

Total:

$5699

$151.96

Oct 30, 2013 (without reinvestment)

Company

Shares

Price/Share

Total Price

Div/Share

Div/Year

Rockwell Automation

100

$110

$11,000

$2.08

$208.00

Rockwell Collins

100

$70

$7000

$1.20

$120.00

Total:

$18,000

$328.00

Oct 30, 2013 (with reinvestment)

Company

Shares

Price/Share

Total Price

Div/Share

Div/Year

Rockwell Automation

161

$110

$17,710

$2.08

$334.88

Rockwell Collins

147

$70

$10,290

$1.20

$176.40

Total:

$28,000

$511.28

In the next table, I show the returns of the Rockwell portfolio (assuming only the Rockwell companies are kept and analyzed).

Portfolio Return (Rockwell's only)

Without reinvestment

With reinvestment

1993-2001

3.4%

9.3%

2001-2013

11.7%

14.2%

1993-2013

9.6%

12%

I think it's fair to say that Collins and Automation did the heavy lifting of the portfolio. Before the final spin-off, the conglomerate did okay, but not exceptional. But after the final spin-off, these companies were able to increase shareholder value substantially on their own. Let's try to identify all that we've learned.

Investing Lesson #1: Large-Cap companies are quite resilient

Remember that Rockwell International was no small company. I'd have to check how much capitalization qualified as a "Large-cap" company in 1993, but I'm guessing Rockwell International was on the list. It had a lot of things going against it including: cutbacks to defense and space spending, several profit-draining units in various industries, and seemingly no real vision (except to break itself up). But it's still here albeit in different forms.

One of the great benefits about owning blue-chip stocks is that they have the ability to change and adapt. Sometimes changes can be done internally and examples include: IBM (IBM), McDonald's(MCD), Apple (AAPL) and Aflac (AFL). Other times, business adaptations are done externally and these include spin-offs, mergers, or acquisitions. When done for the right reasons, these events benefit shareholders over the long term.

Investing Lesson #2: Reinvested Dividends Make a Difference

When we started this in 1993, you were only getting $23 every 3 months. Although that would've purchased 3 or 4 movie tickets back then, you probably would've been able to continue your life without that extra income. Since you decided to check the box that said "Re-invest Dividends", you now have an extra $10,000 in your portfolio today!

Checking the "Re-invest Dividends" box got you a 12% yearly return instead of a 9.6% yearly return. That is pretty cool. It's one of the single-easiest things you can do to maximize your wealth.

Investing Lesson #3: Try to Focus on Long-term Earnings and Dividend Growth

Below is a chart showing the total earnings from both Rockwell's from 1992 to 2012.

Total EPS
(Click to enlarge)

Is it okay for a company to experience a hiccup in earnings? Yes; as it's just the natural ebb and flow of capitalism. While it's not unheard of to have steady increasing earnings for 20 straight years, it is rare. For most companies, use 3-5 year rolling averages in your analysis. This will help smooth out the bumps in earnings. Even for a cyclical company such as Rockwell, the EPS continued to go up over the long run.

Below is a chart showing the total dividends from both Rockwell's from 1992 to 2012.

Total DPS
(Click to enlarge)

The only dividend decreases were due to spin-offs and they all seemed reasonable at the time. Otherwise, the total dividend of the combined Rockwell companies continues to climb. Although there have been several dividend freezes over the years for the 3 Rockwell companies involved, no ill-mannered cuts is a major positive signal showing the competency of management. Since the final spin-off, both Rockwell's have become quasi-dividend-growth companies while growing their dividends about 10% per year.

Investing Lesson #4: My Favorite Charlie Munger Quote: "Sit on your Ass"

How much trading was involved in this article? None. The best way to be a REAL investor is to find a great company that has:

  1. A lineup of great products or services that will still be needed in 20+ years
  2. High probabilities for future EPS growth
  3. A great history of increasing dividends
  4. A reasonable earnings multiple (<20 for most large cap companies)
  5. Management that is shareholder friendly

After you find a company you like, fill out the forms to be an investor. Then sit down, and let the company do what it does best: make money for you. Keep an eye on it every quarterly report or so. Keep doing this with another 10-20 of your favorite companies. Absent of deteriorating fundamentals, no trading is required.

Investing Lesson #5: Rockwell International was a Poor Investment until 2001

Remember earlier when we said that Rockwell returned 8.8% per year from 1993 to 2001 and 14.2% from 2001 to 2013. Some may say that the conglomerate years were poor, especially when compared to the high growth of the 1990's. They're probably right. However, keep this in mind: hindsight is 20/20. It's very hard to predict the future of any company.

But guess what? You still made 8.8% per year! No one should complain about 8.8% per year! You know the 100 year historical averages: inflation, gold, and residential housing return 3% per year, bonds return 4% per year, while stocks have returned 8% per year. With interest rates at record lows, stocks sure seem to be the most intelligent for the long term investor. I'd take a "slow" blue-chip over a block of gold any day.

Epilogue: What happened to each company?

Boeing is of course doing great. It now operates in a commercial duopoly and also has steady earnings from defense. It's one of those "if only" stocks.

Conexant continued the spin-off legacy and spun off Jazz Semiconductor, Skyworks Solutions (SWKS), and Mindspeed Technologies (MSPD). Only Skyworks is actually making money reliably. Conexant and Jazz made themselves private. Mindspeed is still trying to figure out how to make money.

Meritor Automotive reduced its dividend in 2002 and canceled it in 2010. During its first years as a new company, it saw steadily increasing EPS. Then it merged with Arvin industries in 2000 and has seen little earnings since. This may be a case of a merger gone badly. When confronted with company-changing activities, remember to perform your due diligence on the event. As my own personal rule of thumb for large-cap companies, I dislike mergers and large acquisitions, while I like spin-offs and small acquisitions. This rule of thumb falls upon my own short history of investing experience and research. I'd be curious as to other people's experience on this issue.

Rockwell Collins provides avionics and other aerospace products and services for both the commercial and defense aerospace sectors. It continues to churn out increasing earnings and dividends to its shareholders.

Rockwell Automation provides industrial automation, power, control and information solutions for various industries. It also continues to churn out increasing earnings and dividends to its shareholders.

Source: Investing Lessons From Rockwell International