Conglomerates are large multi-national businesses operating across multiple business segments, or in many cases in different industries. The businesses are based upon a structure where a parent company oversees a number of subsidiaries, often engaged in entirely different businesses. Over the past few days, the market has sold off significantly, and currently a number of conglomerate stocks can be purchased at prices that will allow dividend-growth investors to obtain significant income and capital appreciation.
General Electric (GE)
General Electric is perhaps the most well known of conglomerate stocks. The company has diverse business operations, arranged among industries like energy, healthcare, finance and transportation, all of which fall under the umbrella of General Electric. GE reported earnings before the bell on October 19, that narrowly missed analyst revenue estimates. Since the report, shares have fallen 6.4%, and currently shares can be purchased for $21.34.
At the current price, shares of GE have a TTM P/E of 15.7. Over the past year, GE has grown earnings per share by 10.6%, and anticipates growing them by 12% over the coming years. The company has shown strong growth in the industrial units, which have seen double-digit growth in emerging markets. The GE Capital unit has continued to get stronger, and year to date has returned $5.4 billion to the parent company. The company currently pays a $0.68 annualized dividend, giving the stock a 3.2% yield at today's price. Paying out 50% of earnings, and with earnings expected to grow by greater than 10% a year, GE's dividend appears to be safe and have room to grow.
The company, which was crippled by its GE Capital unit during the financial crisis, has gone back to its industrial roots. By re-focusing its business, GE has been able to reduce the company's dependence on the finance arm by reducing GE Capital as a percentage of the company, expand margins by focusing on higher margin industrials, and deliver sizable returns to shareholders.
After slashing the dividend in 2009 GE has provided investors with four dividend increases, and it appears that another may be forthcoming prior to the next dividend payment. The company has increased the dividend payment for the January payment each of the last two years, and with the balance sheet strengthening and GE Capital providing an influx of cash to the parent company, I would expect this trend to continue. After this most recent sell-off, GE has become one of the most attractive stocks on the market. The company has a solid dividend yield, sound growth prospects, and global business operations. As the economy sputters along, GE will continue to refine operations to become a leaner and more efficient company poised to capitalize on an eventual economic recovery. Investors who purchase the stock at these prices get a great company at a great valuation to see significant gains over the years ahead.
3M operates market segments as well, with operations in electronics, healthcare, home and office, security, and manufacturing among others. 3M shares also sunk in light of the GE revenue miss, and fell on their own revenue miss and issuance of soft guidance(Tuesday Oct 22). The company stated that it was lowering full-year 2012 guidance "Reflecting current economic realities." In the time since the GE earnings report, and its own weak earnings and guidance MMM shares have dropped 6.1%.
Shares, which currently trade for $88.88, have a TTM P/E ratio of 14.2, slightly below the five-year average of 14.8. 3M has grown earnings by 8.5% year on year, and anticipates growing EPS by nearly a 10% CAGR over the next five years. With an annualized dividend of $2.36, shares yield 2.66% at today's price. The company has very low debt and pays out just 36.6% of earnings as dividends at this point so the dividend appears to be well covered at this time.
3M is a well known stock among dividend-growth investors. The company began its current streak of annual dividend increases in 1959, and has been rewarding shareholders ever since. MMM is a stock that will not run up significantly over the course of days or weeks, but investors who buy in at this level will be rewarded with a steady performing, rock solid company, providing consistent returns and a growing income stream.
Dupont competes in many industries including automotive, agriculture, healthcare, energy and chemicals. The company reported third-quarter earnings before the market opened on Tuesday, and missed on both earnings and revenue. The company missed by $0.17 on earnings, and fell $750 million short on revenue for the quarter. Dupont announced plans for restructuring and plans to cut 1,500 jobs over the next 18 months, and reduced full-year 2012 guidance from $3.25-3.30. This falls well below analysts consensus estimates of $3.93 and 2011 EPS of $3.55.
Following this poor earnings announcement shares have fallen nearly 10% over the two trading days. Shares currently trade at $44.86, giving them a P/E ratio for 2012 of 13.8 based upon the low end estimate for 2012 earnings. This is significantly below the company's 5-year average P/E ratio of 28. DD projects just modest earnings growth of 4.6% in the years ahead. DD currently pays $1.72 in annual dividends, which equates to a 3.8% yield at today's prices. Dupont appears to have the ability to cover dividend payments in the years ahead, even amid the tepid earnings growth.
At the current share price DD appears to be undervalued. While the company has significantly underperformed this year, management has stated that the company is "taking the necessary steps" to move into higher growth and higher margin businesses like biotech and nutrition. DD will be challenged to move into the businesses, but the company is well established and has the experience to navigate the challenges ahead. Dupont has consistently paid dividends since 1904, but is not typically followed by dividend growth investors, given that the company held the dividend consistent from 2008 through 2011. While significant dividend increases are not likely forthcoming in the near term, long-term investors can purchase a high-quality established company, at a favorable valuation, yielding near 4% for significant capital appreciation. Over the long term I would anticipate DD growing the dividend as earnings per share recover and grow.
Conglomerate stocks offer investors opportunities, particularly during trying market times. The companies generally have diversified business models, which can insulate them from challenges facing individual markets, but their broad market exposure positions them well to benefit from an economy that is performing well. While significant headwinds continue to weigh on the global economy, investors can buy quality conglomerates at favorable valuations to profit from the eventual economic recovery. The stocks mentioned in this article have all been subject to significant pullbacks over the past week, and now trade at what could be attractive entry points for long-term investors.
Disclosure: I am long GE.