These 2 Less Known Industrials Are Offering Safe Returns

Includes: B, ROK
by: Winning Strategies


Diversified industrial companies are showing strong growth.

These companies are making double digit growth in earnings, which is allowing them to make significant increase in their dividends.

Barnes Group and Rockwell Automation are two attractive small-caps with strong upside potential.

Diversified industrial companies are showing strong momentum over the past two years with the steady growth in the economic environment and business activities all around the globe. On the back of a favorable business situation, most of these companies are generating mid-single digit growth in sales and double-digit growth in earnings. We have witnessed this trend in the earnings of large-cap industrials including 3M (NYSE:MMM), General Electric (NYSE:GE), Illinois Tool Works (NYSE:ITW), Honeywell International (NYSE:HON) and others.

On the other hand, small-cap industrials are also generating robust growth with the stable economic environment. Their business models are directly correlated with the economic and business growth activities. With the increase in manufacturing, construction, equipment making activities, IMF has predicted the global economy to grow at 3.8% in 2015. Therefore, we can expect improved earnings from the diversified industrial companies in the following year. Recently, I expressed my opinion on several large-cap diversified industrial companies. Thus, in this article, I decided to pick two small-cap industrials, which are offering strong dividends, and have potential to grow in the coming days.

Rockwell Automation (NYSE:ROK) is one among the diversified industrial companies that is offering safe returns for investors. The company has recently increased its quarterly dividends to $0.65/share from $0.58/share, yielding at 2.5%. Rockwell Automation is a provider of industrial automation power, control and information solutions. The company is operating in two segments including control products & solutions and architecture & software. With the total market capitalization of $3.3B, the company also has presence in the global markets, which is allowing it to grab market opportunities all around the globe.

With its innovative products and technologies, Rockwell is generating double-digit growth in earnings and predicted to keep its momentum over the next year as economic indicators are strong. In 2014, the company had posted record growth in sales and earnings per share. On 4.4% of organic growth, its adjusted earnings per share grew by 15%. Going forward, Rockwell is looking to sustain its profitability. The company is looking to generate mid-single digit growth in sales and EPS of $6.55 - $6.95. Its cash flow generating potential is also enhancing with the growth in earnings.

Importantly, Rockwell is returning most of its free cash flows to investors in the form of dividend and buybacks. In fiscal 2014, it had returned around 87% of its free cash flows to investors in dividends and buybacks. Along with the dividend announcement, it also announced a huge buyback of $1B. Its focus on lowering outstanding shares will further enhance its earnings per share and dividends in the coming days. In addition, I believe strong financial performance, dividends and focus on buybacks will drive its share price performance.

On the other hand, Barnes Group Inc. (NYSE:B) offers engineered products and services to an industrial and aerospace manufacturer and service provider, used in critical applications that provide transportation, manufacturing and technology. Barnes is operating in two main business segments including industrial and aerospace. We have been seeing strong growth in the industrial businesses over the past two years, which is resulting in a strong demand for industrial technologies and products. The company is grasping on the growth opportunities with acquisitions and organic growth. Its recent Manner acquisition added considerable growth in sales in the most recent quarter.

On the other hand, with the growth in commercial air traffic, its aerospace business is also on momentum. This business segment had generated 9% growth in sales in the third quarter of 2014. Overall, Barnes had posted massive sales growth of 18% and earnings per share enlarged by 64% over the past year quarter. Due to the recent acquisition, Barnes has increased its earnings guidance for the full year to $2.10 to $2.15 per diluted share, a double-digit growth from the earlier estimate.

Barnes is also offering healthy returns for investors. Recently, the company has increased its quarterly dividends by 9% to 0.12/share, yielding at 1.48%. Its cash generating potential is strong as cash conversion rate is approximately at 100% of net income. Therefore, with the increase in earnings and strong cash conversion rate we can expect the company to sustain its dividend growth.

In Conclusion

Diversified industrial companies are likely to generate big profits in the coming days on the back of a stabilized economic environment. These companies are aggressively working on acquisitions along with investing on its existing businesses to capitalize on the growth opportunities. Both Barnes Group and Rockwell Automation are heading in the right direction to sustain their momentum. Both companies are offering strong returns and their dividends are completely safe to me with strong cash flows.

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.