As the economy recovers and manufacturing picks up again, industrial product stocks should benefit. These high yield dividend stocks would potentially make a good addition to many portfolios by providing exposure to improving economic conditions with the added benefit of current income.
The analysis was conducted by screening through stocks within in the sector and limiting the selections to stocks with a greater than 1% dividend yield with a desire to find at least a 2% dividend yield. The initial screen showed that there were 442 stocks in this sector and 116 offered a dividend yield at .1% or higher with the maximum yield at 9.1% for Ituran Location and Control Ltd. (ITRN).
This analysis is limited by the stock screening tool that I used and one clear issue is that the dividends were not completely current in all cases. In cross referencing the Zacks.com tool against Yahoo Finance showed discrepancies between some of the smaller stocks. A few stocks were eliminated due to this.
|Ticker||Name||2/17/2011 Price($/Share)||Dividend Yield (%)||Market Cap ($ Millions)|
|ITRN||Ituran Location and Control Ltd.||16.56||9.1||389|
|SR||The Standard Register Company||3.42||5.9||99|
|SGC||Superior Uniform Group Inc.||10.86||5.0||64|
|FRD||Friedman Industries, Inc.||10.13||4.3||69|
|WSCI||WSI Industries Inc.||4.97||3.2||14|
|EEI||Ecology & Environment, Inc.||14.84||3.0||63|
|BMS||Bemis Company, Inc.||33.04||2.9||3,575|
|MSA||Mine Safety Appliances Co.||34.31||2.9||1,246|
|CVR||Chicago Rivet and Machine Co.||17.90||2.7||17|
|MYE||Myers Industries, Inc.||9.93||2.6||351|
Data provided by Zacks.com services as of February 18, 2011. Prices are from market close on February 17, 2011.
The first observation is that most of these companies have very small market capitalizations with 11 of the 16 showing a market capitalization below a $1 billion. Furthermore, six have a market capitalization below $100 million. Such low market capitalizations are often indicative of thinly traded stocks or stocks that are struggling. There is always the potential for a dividend cut. There is no point to purchasing a 5% dividend only to watch the price decline by 10%, or worse yet go to $0 per share. A rapidly declining stock price could simply result in a high dividend yield based on historical dividends being used. Another issue is that some stocks, such at ITRN show very irregular historical dividends.
The second screen was to select companies with lower valuations and ensuring reasonable metrics across other valuation metrics.
- Low valuation as measured by Price to Operating Cash Flow ( <20x )
- A growing stock as measured by 5 Year Historical Revenue Growth ( >1% )
- Good asset productivity as measured by 5 year average Return on Assets ( >5% )
- Market capitalization of sufficient size ( >$300 million )
This screen narrowed the list to 26 companies, eliminating some well known names including Eaton Corp. (ETN), Deere & Company Inc. (DE), and Cintas Corp. (CTAS). From this data a final ranking of the top 10 was determined subjectively and few stocks were considered that did not meet all the criteria. It is important to note that while these criteria suggest reasonable stock valuations and prospects, additional issues such as business environment, management strategy, and other less quantifiable issues should be considered.
Table 2: Top 10 Industrial Products Dividend Stocks
|Ticker||Name||Dividend Yield (%)||5 Year Historical Sales Growth (%)||Price/ Cash Flow (x)||ROA (5 Year Avg) (%)|
|MSA||Mine Safety Appliances Co.||2.9||1.3||17.5x||7.1|
|BMS||Bemis Company, Inc.||2.9||3.3||10.0x||5.7|
|ITW||Illinois Tool Works Inc.||2.5||1.7||15.7x||10.6|
|EMR||Emerson Electric, Inc.||2.2||1.7||16.2x||10.2|
|SWK||Stanley Black & Decker Inc.||1.8||9.7||14.2x||6.1|
Data provided by Zacks.com services as of February 18, 2011.
A screening method is a good place to start but due to the analytical nature of the assessment there are some areas that would require additional analysis before making an investment decision. These issues include data samples, general management strategy, and trade off assessments.
- Data samples – The screening is driven by capturing most recent historical performance. Companies have anomalous years and quarters that could throw off this assessment should the most year be a poor year. Furthermore, 5 year time frames are used for two data types which could result in distortion based on a data that is 5 years old. For example, a company that has refocused its business 4 years ago and exited unprofitable markets might have a flat to declining 5 year sales growth record, but still be an excellent investment opportunity.
- General Management Strategy – What are all the intangibles and other issues behind these numbers? Finding great investment opportunities demands this level of attention.
- Trade offs – I screen out companies with higher price to cash flow ratios; however, with sufficient growth these companies could offer better potential than a slower growth company with a slightly lower valuation multiple. It also raises the question of how to compare a company with high sales growth and low asset returns to a low sales growth company with high asset returns. How many percentage points of sales growth is a percentage point of ROA worth? In order to proxy some aspects, I looked at the Price/Cash Flow against sales growth ratio, assuming that sales growth could proxy for cash flow growth which is a somewhat risky assumption. I also reviewed a modified Gordon Growth Dividend formula as described in one of my previous articles.
These stocks are potentially attractive ways to capture economic upside with current income. Unlike the consumer discretionary dividend stocks that I reviewed earlier, these stocks appear to show more robust promises. Many consumer discretionary stocks tended to have larger short interests. All of these stocks represent interesting potential long investments.
Disclaimer: This article is for informational and educational purposes only and shall not be construed to constitute investment advice. Nothing contained herein shall constitute a solicitation, recommendation or endorsement to buy or sell any security.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.