Electricity, It’s Not All About The Utilities
When I start thinking about electricity and stocks and dividends my first thought is naturally about the utility sector. The utilities are well known for stable, steady revenue and above-average dividends but they are not the only option when it comes to electricity. There is an entire industry of companies that make electrical equipment and supplies for business and industry and some of them pay great dividends.
Eaton Rebounds Strongly In The 3rd Quarter
Sales of electrical components are still down on a YOY basis but the rebound in business is strong. Eaton (NYSE:ETN) reports its revenues fell-14.7% from the previous year but accelerated 17.4% from the previous quarter. The results are much better than expected, about 750 basis points better, and fueled by rising demand in most segments.
Moving down to the bottom line, the company reports that GAAP and adjusted EPS both topped the consensus by a wide margin. Adjustments to earnings include $0.07 in charges related to the company’s restructuring plan, a plan intended to bring Eaton into alignment with the post-COVID business environment (read that less aerospace, more EV, etc).
Regarding the dividend, Eaton pays $2.92 annually or about 2.75% with shares trading near $110. The company is paying about 70% of this year’s earnings which is a bit high but there are mitigating factors. The first is that next year’s consensus estimates have the payout ratio falling to 60% and the balance sheet is in good shape.
The company is carrying some debt but it is low in relation to equity and capital, coverage is high and free-cash-flow is available. The 4th quarter distribution has already been declared, in-line with the previous, but I expect an 8th consecutive increase during the next reporting cycle. Oh, and Eaton is also actively engaged in share repurchases.
"We remain on track to achieve the midpoint of our guidance for 2020 full year free cash flow, which we are narrowing to between $2.4B-$2.6B … We repurchased $177M of our shares in Q3, making our YTD repurchases a total of $1.5B. For the full year 2020, we continue to target share repurchases of between $1.7B-$1.9B."
Emerson Electric, Raises Dividend And Resumes Buyback
Emerson Electric (NYSE:EMR) is more of a specialized electrical component manufacturer with a focus on automated components for industry and climate control components for the residential market. This company also just reported its calendar 3Q/fiscal Q4 results and, like its cousin, blew past the consensus targets. The top-line revenue came in at $4.56 billion, down -8.2% from last year but up 16.25% from the prior quarter. Revenue topped the consensus by 1.5%, not a large margin, but the bottom-line results are better.
On the bottom line, adjusted earnings of $1.10 beat by $0.16 while GAAP EPS of $1.20 beat by $0.30. The adjusted earnings include costs related to restructuring efforts akin to those of Eaton. Looking forward, the company is expecting revenue gains in the range of 1% to 4% and to increase the dividend another 2%. Regarding the balance sheet, Emerson is well-capitalized, has a low 3.3X leverage ratio, and ample coverage. With free-cash-flow on the rise, the company has decided to resume the buyback program up to $1 billion and says it has the resources for strategic acquisitions.
“Within this framework, as management forecasted in April 2020, we expect overall revenue to return to growth in the third quarter of 2021. Commercial & Residential Solutions is expected to return to growth earlier than originally expected, while Automation Solutions is expected to return to growth later in the year. Due to the delayed recovery in many automation markets, we are increasing restructuring spend within Automation Solutions,” says Emerson in the press release.
