Dissecting The Diversified Machinery Industry

 |  Includes: CMI, DOV, GE, ITW
by: Dividendinvestr

By Renee O'Farrell

Diversified machinery is a smart industry for investors to look toward now that the economy is on the mend. As companies look to expand their operations, they will need equipment to do so. This means that the companies that make that equipment are going to see a surge in profits and, as such, will be amongst the first to realize the improvements in the economy.

General Electric (NYSE:GE) is the top company in the diversified machinery industry. It recently traded for $18.71 a share, up just over 7% year to date. At that price, the $201.26 billion market cap company is trading at 10.80 times its forward earnings. Over the past 5 years, the company's earnings have fallen by an average of 8% a year, but hopes are a little higher going forward. Analysts expect GE's earnings will increase by an average rate of 13% over the next 5 years. GE also pays a 3.58% dividend yield on a 52.18% payout ratio. Warren Buffett's Berkshire Hathaway (NYSE:BRK.B) is a fan of GE, as is Ken Fisher's Fisher Asset Management and David E. Shaw's D E Shaw.

Illinois Tool Works (NYSE:ITW) is much smaller with a market cap of just $26.92 billion but it manufactures many of the same things GE does. ITW is also positioned similarly. It recently traded at $55.73 a share, which is 12 times its forward earnings and up 21.48% so far this year. Over the past 5 years, ITW's earnings have increased by 8.20% a year on average. Going forward, the consensus is that the company's earnings will increase by 12.26%. ITW also pays a comparable dividend to GE. The company pays a 2.55% dividend yield on a 36.51% payout ratio. In other words, ITW is positioned very much like GE, but GE is still a better choice.

The $20.46 billion market cap rival Cummins (NYSE:CMI) would be a better choice than ITW and roughly on par with GE. CMI is priced at just over $104 a share, which is just 8.88 times its forward earnings. The company's share price has increased 21.36% year to date. CMI's dividend yield is only 1.50% but its payout ratio is just 14.34%. Also, the company's average earnings growth over the past 5 years was 21.88%. Its earnings are expected to continue to grow at a rate of 15.16% a year on average over the next 5 years. Jim Simons' Renaissance Technologies, Ken Griffin's Citadel Investment Group and Donald Chiboucis' Columbus Circle Investors are bullish about CMI.

Dover (NYSE:DOV) is another competitor in this industry, albeit a much smaller one. It has a market cap of $10.80 billion and recently traded at $58.47 a share, up 1.78% so far this year. DOV also pays a dividend of 2.14% on a payout ratio of 26%. The company's earnings have grown by 9.10% a year on average over the past 5 years. Going forward, analysts say the company's earnings will increase by an average of 11.13% a year for the next 5 years. At its current price, DOV is trading at 10.63 times its forward earnings.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.