The diversified industrial industry is one of the industries that have been gaining momentum as the economy heals. This industry is directly interlinked with the economic environment as evidenced by manufacturing, production and services of electronic, industrial, residential and aerospace business. Global economy has continued to heal over the past four years and the International Monetary Fund predicts that it will heal further in the coming years. The economy is currently growing at the rate of 3.7% in 2014 and will grow at 3.9% in 2015 on the back of growing emerging markets, stabilization in U.S. and improvement in the Euro Zone.
The growth in the economic environment is enhancing demand for the diversified industrials business. 3M (NYSE:MMM), General Electric (NYSE:GE), Honeywell International (NYSE:HON) and United Technologies (NYSE:UTX) are some of the prominent names in the diversified industrial industry, which has been generating massive growth in their revenue and earnings over the past few years. These seem to grow at double-digit rates. In this article, I pick 3M and Honeywell International to see how they are operating in the favorable business environment. I will also look at their business strategies, financial situations and future outlooks to predict whether they are good stocks for defensive investors.
Where does 3M stand?
3M is a diversified industrial company with a strong business model and extensive global footprints. The company operates in five major business segments including industrial, health care, consumer, electronic, energy, safety and graphics. 3M has been working on a very attractive business plan, which includes portfolio management of business. This will be done so as to align with the market trends in acquisitions and innovation. The company has invested billions in acquisitions and plans to invest around $10B over the next few years in order to acquire business, which will further expand its market share and sales. It is also spending a huge percentage of its sales on research and development so as to launch innovative products and technologies. It is also seeking to continue spending around 5% of its sales on research and development to keep enhancing its portfolio and market share.
3M has further categorized its business strategy in Heartland, Push Forward and Strategic Review. The Heartland division is utilizing multiple 3M technology platforms to strengthen its technology position and chase adjacencies. Push Forward will help market penetration on a worldwide base. Meanwhile, Strategic Review will look at the performance of its business. With this strategy in place, 3M is generating a massive growth from its business. It has been generating record growth year-over-year and quarter-over-quarter in the past three years. It is growing its earnings per share at a double-digit rate. Since 2011, it has grown its earnings per share from $5.96/share to $6.71/share in 2013. Presently, in 2014, 3M is planning to grow its earnings per share at another double-digit rate. In the first two quarters, it had generated a double-digit growth rate in the earnings per share and still seems to be on track to generate earnings per share of around $7.30 to $7.55 in 2014.
Looking at the cash side will expose more facts about the company's ability to make investments and returns for investors. As its earnings grow so does its cash generating potential. Its operating cash flows are completely covering its capital requirements along with providing cover to its dividends. Therefore, it has been increasing its dividends at a high rate and aggressively reducing its outstanding shares. Recently, it increased the quarterly dividend by 35% and it has repurchased $1.7B of outstanding shares in the past two quarters. Additionally, it's still seeking to repurchase around $4B of shares at the end of this year.
Where does the Other Player stand?
Honeywell is a technology & manufacturing company that has a global footprint and a strong penetration in the market. The company is operating in four business segments including automation & control solutions, aerospace, transportation systems, performance materials and technologies. Honeywell has a strong business model with both short and long cycle businesses. Furthermore, it has a strong penetration in the market, which results in a strong organic growth for the company. In addition to that, the company is continuously launching new products and technologies along with taking other initiatives, like acquisitions, to keep growing its sales. It is also planning to amalgamate its transportation and aerospace segments to increase operational efficiencies. This efficient management allows it to generate very strong growth rates in earnings and a mid-single digit revenue growth.
According to the company's five-year plan, it is planning to continue with a double-digit growth rate in earnings and cash flows. Currently, it has been generating a double-digit growth in earnings and is likely to sustain this trend with its portfolio management and innovative technologies. At the moment, all its business segments have been generating double-digit growth rates except aerospace. Moreover, the company's initiative to amalgamate transportation and aerospace segment will definitely enhance its operational efficiencies. Honeywell's cash generating potential is strong enough to support investments in growth opportunities and dividends for investors. Sufficiently, in the most recent quarter, it has generated $1.1B in free cash flows while dividend payments were only at $373M. This represents a huge room for potential dividend increase. I am expecting dividend increases from the company because of its cash generating potential and plan to produce double-digit growth in its free cash flows.
The diversified industrial companies will continue to generate big profits in the coming days with the stabilization of the economy. Both 3M and Honeywell International are following the right strategies, which are resulting in massive growths for them. Their fundamentals are also moving nicely, so I recommend holding these stocks for consistent dividend growth and steady price appreciation.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.