Ingersoll-Rand: Good Total Return And A Dividend Growing At 12%
- Ingersoll-Rand total return over-performed the DOW average for my 52 month test period by 3.50%, which is good and the company has a solid growing dividend income.
- Ingersoll-Rand has increased its dividend for eight years in a row and presently has a yield of 2.1 which is a little above average.
- Ingersoll-Rand three-year forward CAGR of 10% is good and will give you good growth with increased earnings from the infrastructure development.
This article is about Ingersoll-Rand (NYSE:IR) and why it's a buy for the total return investor that also wants some dividend income. Ingersoll-Rand is one of the largest industrial and commercial products and services companies in the world. IR is a cyclical investment for the total return investor who also wants some income.
The stock comprises 4.27% of The Good Business Portfolio, my IRA portfolio of good business companies that are balanced among all styles of investing. The company has steady growth and has cash it uses to increase the dividends each year and add bolt-on companies.
When I scanned the five-year chart, Ingersoll-Rand has a fair chart going up and to the right in a fair slope. In a good economy, IR shines like in years 2016 and 2017. In years 2014 and 2015 IR was consolidating
Fundamentals of Ingersoll-Rand will be reviewed on the following topics below.
- The Good Business Portfolio Guidelines
- Total Return and Yearly Dividend
- Last Quarter's Earnings
- Company Business
- Recent Portfolio Changes
I use a set of guidelines that I codified over the last few years to review the companies in The Good Business Portfolio (my portfolio) and other companies that I am taking a look at. For a complete set of the guidelines, please see my article " The Good Business Portfolio: Update To Guidelines and July 2016 Performance Review". These guidelines provide me with a balanced portfolio of income, defensive, total return and growing companies that hopefully keeps me ahead of the Dow average.
Good Business Portfolio Guidelines
Ingersoll-Rand International passes 11 of 11 Good Business Portfolio Guideline, a good score (a good score is 10 or 11). These guidelines are only used to filter companies to be considered in the portfolio. Some of the points brought out by the guidelines are shown below.
- Ingersoll-Rand does meet my dividend guideline of having dividends increase for 7 of the last ten years and having a minimum of 1% yield, with eight years of increasing dividends and a 2.1% yield. Ingersoll-Rand is, therefore, a fair choice for the dividend income investor. The five-year average payout ratio is low at 34%. After paying the dividend, this leaves cash remaining for increasing the business by buying bolt-on companies.
- I have a capitalization guideline where the capitalization must be greater than $7 Billion. IR easily passes this guideline. IR is a large-cap company with a capitalization of $21.3 Billion. Ingersoll-Rand 2018 projected cash flow at $1.6 Billion is good allowing the company to have the means for company growth and increased dividends.
- I also require the CAGR going forward to be able to cover my yearly expenses. My dividends provide 3.3% of the portfolio as income, and I need 1.8% more for a yearly distribution of 5.1%. The three-year forward CAGR of 10% meets my guideline requirement. This good future growth for Ingersoll-Rand can continue its uptrend benefiting from the continued strong growth in the worldwide economy.
- My total return guideline is that total return must be greater than the Dow's total return over my test period. IR passes this guideline since their total return is 51.09%, more than the Dow's total return of 47.59%. Looking back five years, $10,000 invested five years ago would now be worth over $22,100 today. This makes Ingersoll-Rand a good investment for the total return investor looking back, that has future growth as the economy continues to grow. As an added plus we have President Trump cutting corporate taxes which will increase earnings since IR was paying a 22% five-year average tax rate.
- One of my guidelines is that the S&P rating must be three stars or better. IR's S&P CFRA rating is three stars or hold with a target price to $98, passing the guideline. IR's price is presently 12.6% below the target. IR is under the target price at present and has a low PE of 16, making IR a good buy at this entry point. If you are a long-term investor that wants good steady increasing dividends and future total return growth you may want to look at this company.
- One of my guidelines is would I buy the whole company if I could. The answer is yes. The total return is good, and the above average growing dividend makes IR a good business to own for income and growth. The Good Business Portfolio likes to embrace all kinds of investment styles but concentrates on buying businesses that can be understood, makes a fair profit, invests profits back into the business and also generates a good income stream. Most of all what makes IR interesting is the potential long-term growth of their business as the working population and economy increases. IR gives you an increasing dividend for the dividend investor and good total return.
Total Return and Yearly Dividend
The Good Business Portfolio Guidelines are just a screen to start with and not absolute rules. When I look at a company, the total return is a key parameter to see if it fits the objective of the Good Business Portfolio. Ingersoll-Rand passes this total return guideline against the Dow baseline in my 52.0-month test. I chose the 52.0 month test period (starting January 1, 2014, and ending to date) because it includes the great year of 2017, and other years that had fair and bad performance. The good total return of 51.09% makes Ingersoll-Rand a good investment for the total return investor that also wants a steadily increasing income. IR has an above average dividend yield of 2.1% and has had increases for eight years making IR also a good choice for the dividend investor. The Dividend is estimated to be increased August 2018 to $0.50/Qtr. from $0.45/ Qtr. or an 11% increase.
DOW's 52.0 Month total return baseline is 47.59%
52.0 Month total return
The difference from DOW baseline
Yearly Dividend percentage
Click to enlarge
Last Quarter's Earnings
For the last quarter on April 24, 2018, Ingersoll-Rand reported earnings that beat expected by $0.07 at $0.70 and compared to last year at $0.57. Total revenue was higher at $3.38 Billion up more than a year ago by 12.6% year over year and beat expected revenue by $30 Million. This was a good report with the bottom line and the top line increasing. The next earnings report will be out late July 2018 and is expected to be $1.72 compared to last year at $1.49, a good increase.
The graphic below shows the growth potential for IR.
Source: IR earnings call slides
Ingersoll-Rand is one of the largest industrial and commercial companies in the United States and foreign countries.
As per Reuters
Ingersoll-Rand provides products, services, and solutions to improve the quality and comfort of air in homes and buildings, transport and protect food and perishables. The Company's business segments include Climate and Industrial. It is engaged in the design, manufacture, sale, and service of a portfolio of industrial and commercial products that include brand names, such as Ingersoll-Rand, Trane, American Standard, ARO and Club Car. Its Climate segment includes Trane and American Standard Heating and Air Conditioning, which provide heating, ventilation and air conditioning systems, and commercial and residential building services, parts, support, and controls. It offers energy services and building automation through Trane Building Advantage and Nexia. Its Industrial segment includes compressed air and gas systems and services, power tools, material handling systems, ARO fluid management equipment, as well as Club Car golf, utility and rough terrain vehicles."
Overall Ingersoll-Rand International is a good business with 10% CAGR projected growth as the United States and foreign economies grow going forward, with the increasing demand for IR's products. The fair dividend income brings you cash as we continue to see further growth as the world economy grows.
The FED has kept interest rates low for some years, and on March 21 they raised the base rate up 0.25%, which was expected. I believe that they will not raise the rates three more times this year, but will go slow at 1-2 for the rest of 2018, which should help keep the economy on a growth path. If infrastructure spending can be increased, this will even increase the United States growth going forward with better economics for the consumer. The recent market volatility may slow down the FED.
Also as a tailwind, we have President Trump lowering corporate taxes on income. As the corporation foreign and domestic tax rate is lowered, earnings of Ingersoll-Rand business should increase. From April 24, 2018, earnings call Mike Lamach (Chief Executive Officer and Chairman) said
I'd like to begin the call with a brief review of the fundamental elements of our business strategy which drives long-term value creation for shareholders. The first element of our strategy is to continually deliver profitable growth through leadership positions and durable markets. Our end markets are underpinned by global megatrends such as sustainability, and the need to dramatically reduce energy demand and resource constraints in buildings, homes, industrial and transport markets around the world.
We focus on innovation and delivering the most reliable energy-efficient and environmentally-friendly products and services available, enabled by digital and other exponential technologies. We excel at delivering energy efficiency, and reducing greenhouse gas emissions, reducing food waste, preserving natural resources and generating productivity for our customers. We invest heavily in products and solutions to support our competitive edge here, and this continues to be a winning formula for us with our customers and our end markets. Our continued strong growth rates reflect that advantage.
We also take the same advice we give our customers seriously. In 2014, we publicly committed to increase our energy efficiency and reduce the greenhouse gas emissions related to our operations and products. The commitment includes a 35% reduction of greenhouse gas emissions from our own operations by 2020, which we achieved earlier this year, two years ahead of schedule. We conducted an energy audit of our own large facilities and upgraded air-conditioning systems, building controls and lighting, eliminated energy leakage from our compressed air systems, while measuring validating, and reporting the results.
It's important to note that given the seasonality of our business being heavily weighted towards Q2 and Q3, we are just a small fraction of the way into 2018. As I said earlier, we are off to a strong start, and there are a lot of things that are going well. Our end markets are strong, and we are executing well as evidenced by our high levels of growth in both bookings and revenues globally in both our Climate and Industrial segments."
The graphic below sums up the CEO's world growth outlook.
Source: IR earnings call slides
This shows the feelings of top management for the continued growth of the Ingersoll-Rand business and shareholder return with an increase in the future growth. IR has good growth and will continue as the foreign economies grow and demand for industrial and commercial products increase.
Ingersoll-Rand is a good investment choice for the total return and dividend investor with its slightly above average dividend yield and good total return. Ingersoll-Rand is 4.27% of The Good Business Portfolio and will be held and watch it grow. IR will be held in the portfolio and will be trimmed when it reaches 8% of the portfolio. If you want a growing dividend income and good total return in the industrial business IR may be the right investment for you.
Recent Portfolio Changes
I was considering selling the small position in Kraft Heinz Corp. (KHC) that is 0.5% of the portfolio because of its bad performance, and I have better companies for investment. The last earnings showed growth, so I will wait another quarter to see if this continues.
- On March 29 increased position of American Tower (AMT) to 0.8% of the portfolio, I will continue adding to this position as cash is available.
- On March 29 sold entire position of L Brands (LB), it does not look good for the company going forward.
- On March 26 reduced position of L Brands to 1.5% of the portfolio and will continue to sell off position during the next month.
- On March 23 increased position of Freeport-McMoRan (FCX) to 2.4% of the portfolio and will add to this position as cash is available.
- On March 20 increased position of Freeport-McMoRan to 2.2% of the portfolio and will add to this position as cash is available.
- On March 20 reduced position of L Brands to 1.8% of the portfolio and will continue to sell off position during the next few months.
- On March 16 increased position of Digital Reality Trust (DLR) to 2.4% of the portfolio. I want to get this company to a full position of 4%.
- On March 1 increased position in AMT to 0.9% of the portfolio and will continue to add when cash is available.
- On January 31 trimmed Boeing (BA) from 13.1% of the portfolio to 12.8%. I am greedy and am letting BA be much more a part of the portfolio than reasonable money management should allow. The fourth quarter earnings report was fantastic beating estimates by $0.15 at $3.04 (not including tax gain) and with future estimates all showing good growth for 2018. The decrease in deferred costs for the 787 was $581 Million for 36 planes shipped, which was good.
The Good Business Portfolio trims a position when it gets above 8% of the portfolio. The four top companies in The Good Business Portfolio are, Johnson & Johnson (JNJ) is 8.0% of the portfolio, Altria (MO) is 6.8% of the portfolio, Home Depot (HD) is 9.8% of the portfolio and Boeing is 13.6% of the portfolio, therefore BA, JNJ, and Home Depot are now in trim position with Altria getting close.
Boeing is going to be pressed to 13% of the portfolio because of it being cash positive on 787 deferred plane costs at $316 Million in the first quarter of 2017, an increase from the fourth quarter. The second quarter saw deferred costs on the 787 go down $530 Million a big jump from the first quarter. The second quarter earnings were fantastic with Boeing beating the estimate by $0.25 at $2.55. The third quarter earnings were $2.72 beating the expected by$0.06 with revenue increasing 1.7% year over year another good report. The first quarter earnings for 2018 were unbelievable at $3.64 compared to expected at $2.64. I just can't bring myself to sell Boeing.
JNJ will be pressed to 9% of the portfolio because it's so defensive in this post-BREXIT world. Earnings in the last quarter beat on the top and bottom line and Mr. Market did not like it. JNJ has announced a dividend increase to $0.90/Qtr. which is 56 years in a row of increases. JNJ is not a trading stock but a hold forever; it is now a strong buy as the healthcare sector remains under pressure. Take this recent drop to pick up a great company in the medical products field.
For the total Good Business Portfolio, please see my article on The Good Business Portfolio: 2017 4th Quarter Earnings and Performance Review for the complete portfolio list and performance. Become a real-time follower, and you will get each quarter's performance after this earnings season is over.
I have written individual articles on JNJ, EOS, GE, IR, MO, BA, PEP, AMT, PM, LB, Omega Health Investors, Digital Investors Trust (DLR) and Automatic Data Processing (ADP) that are in The Good Business Portfolio and other companies being evaluated by the portfolio. If you have an interest, please look for them on my list of previous articles.
Of course, this is not a recommendation to buy or sell, and you should always do your own research and talk to your financial advisor before any purchase or sale. This is how I manage my IRA retirement account, and the opinions of the companies are my own.
This article was written by
Analyst’s Disclosure: I am/we are long BA, JNJ, HD, OHI, MO, IR, DLR, GE, PM, LB, MMM, IR, EOS, TXN, ADP, KHC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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