Recent Buy: July 13th, 2015

It has been a busy and challenging month for me at my new job, but it’s going well.  I was so used to my old gig where I could finish my work in just a few hours and have time to read about the market, write articles and comment on other inspirational blogs all while leaving the office early.  That easy gig is behind me now, but who wants to take the easy way out when it limits your full potential?  Advancing my pay and building a successful career in television production will take years of my time and commitment just like the dividend growth strategy I’m using for my investments.   I’ve come a long way from serving tables just a few years ago, and now I’m proving to myself that I can change my life for the better.  I’ve been investing fresh capital into my portfolio every single month since I started this blog over a year ago and, even with my higher than average income, I still have to keep it up for many more long years to reach true financial independence.  I say bring it on because I love conquering challenges.

The stock market seems set to climb again after witnessing several days of gains.  It’s pure noise as usual for a long term investor like myself.  I’m averaging into several businesses over time and hope I never have to sell a position.  I’m always on the lookout for those best of class growing companies that raise their dividends each year.  One day I’ll use these dividend payouts for all of my daily expenses and claim financial independence once and for all.

I recently initiated a position in Eaton Corporation (ETN) which I recently listed as one of the five attractively valued businesses I want to own.  ETN has been on my radar for a long a while and on July 13th, I purchased 22 shares for $66.02 each with a $6.95 commission for a total transaction of $1,459.39.  The 3.32% yield on my purchase adds $48.40 to my 12-month forward dividend income for a new overall total of $2,189.08 or an average of $182.42 a month.  My objective for this purchase was for safe higher than average current yield, steady capital growth, and a purchase at a fair or undervalued stock price.

Business Overview

Eaton Corporation was founded in 1911 and since then its customers have looked to it for innovative ways to manage electrical, hydraulic and mechanical power more efficiently, safely and sustainably.  ETN currently employs over 102,000 people and sells products in more than 175 countries.  The company has paid a growing dividend for over 30 years, but sometimes it’ll go a few years without a raise and that’s to be expected in the volatile industrial sector.   Eaton operates in five business segments which are Electrical Products, Electrical Systems and Services, Hydraulics, Aerospace, and Vehicles.  In 2014, net sales were $22.6 billion which is almost twice the 2010 net sales of $13.7 billion.  This growth comes on the heels of some very successful recent acquisitions, and I believe this company’s best days are still ahead.

This is a massive company with presence in many end markets such as Agriculture & Forestry, Aviation, Community Infrastructure, Construction, Data Centers, Energy, Government & Military and Healthcare.  This is one of those behind the scenes businesses where you don’t even notice you’re using or seeing their products, but they’re all around you.  Eaton Corporation pairs well with my holding of United Technologies (UTX), and I’d love to own even more of their competitors such as Parker-Hannifin (PH) and Johnson Controls (JCI).

Fundamentals

A $10,000 investment in ETN 20 years ago would have easily outperformed the S&P 500 and be worth $89,798.85 today.  That’s a total return of 798.42% and an average total annualized return of 11.62%.

2015_JULY_ETN_TOTALRETURN_Revenue has grown from $9.7 billion at the end of 2004 to $22.6 billion at the end of 2014 for a compounded average growth rate (CAGR) of 8.83%.  Earnings per share grew from 2.06 to 3.76 for a CAGR of 6.20%.  These are solid numbers for a higher yielding and boring industrial stock.

2015_JULY_ETN_REVENUEEPS_Eaton has a detailed plan for those investors who fear upcoming business challenges due to interest rate hikes and other global events.  The annual shareholder letter is a great read and the company highlights several areas where it’s maximizing opportunities in this “new normal” global market.

The business headlines over the last several months have highlighted slowed momentum for many organizations and raised investor concerns—stagnant global growth, tough economic challenges in many emerging nations, unusual volatility in currency and commodity prices, regional political instability and increased regulatory reform. At Eaton, we believe these conditions are unlikely to change. Accordingly, we’ve worked hard to craft a strategy to succeed in these new conditions and to ensure that our execution maximizes our opportunities. ~ 2014 shareholder letter.

The business has been using its cash flow very responsibly over the last few years and shows a debt/capital ratio of just 33%.  I’m a big fan of their five acquisitions since 2012 including the largest in Eaton’s history of Cooper Industries.  The Cooper integration is ahead of schedule and already providing greater benefits than Eaton anticipated.  Intelligent acquisitions are key to the long term survival of a business this size, and Eaton has a fantastic track record.

The long term dividend history is impressive.  Even with dividends at a standstill from 1998-2002 and then again in 2009, the 19 year dividend growth rate average through 2014 is an impressive 9.4% and sports a CAGR of 9.1%.  This doesn’t even include the recent 12.24% increase realized in March of this year.  I’m expecting this growth to stay steady, and the rich but sporadic dividend history gives me comfort should I see any future dividend freezes.

2015_JULY_FG_ETN2_These past numbers support my investment objective of a safe and higher than average current yield still growing steadily.  There are always risks though, and ETN has its fair share.

RISKS INCLUDE BUT ARE NOT LIMITED TO:
  • Slower economic growth
  • Currency headwinds
  • Increasing competition
  • Supply chain disruptions

Valuation

Upon initial inspection of ETN’s fast graph, it appears to be slightly undervalued compared to its earnings with a blended P/E ratio of 14.1.  It’s also slightly undervalued compared to its 20 year normal P/E ratio of 14.9.  (For those unfamiliar with Fast Graphs, when the black current price line moves into the dark green earnings area it indicates the business is undervalued.  Here is a basic demo on how to read fast graphs):

2015_JULY_FG_ETN1_Aside from fully understanding a business, I try to invest with some sort of total return expectation which helps me understand whether or not the current stock price is trading at a fair value.  Using Chuck Carnevale’s precise return strategy, I’ve gained confidence in my steady capital appreciation investment objective by estimating the following scenarios:

  • Analyst Estimates:  This calculation uses S&P Capital IQ data to help us predict a reasonable return:

2015_JULY_FG_ETN3_With growth capitalized at a reasonable P/E ratio of 15, I will have witnessed an impressive 12.55% total annualized rate of return through 2017.  That’s a gain of $16.66 in price per share and a $5.83 gain in potential prorated dividend income.  ETN tends to hit or beat analyst expectations about 75% of the time.

  • 2015_JULY_FG_ETN4_Historical Compounded Annual Growth Rate (No Analysts):  Here, I use the lowest annual earnings growth rate from the last decade which is a 7 year annual return to date of 4.7%:

2015_JULY_FG_ETN5_This shows me a total annualized return of 10.90% through 2017.  I’m expecting growth to be higher than that, so I’m in good shape here.  For fun, I plugged in the highest percentage growth from the last ten years, which was a 5 year CAGR of 29.2% and I’d end up with an astonishing 84.94% annualized return through 2017.  That number was a major outlier though and I don’t expect to land anywhere near it.  I’d be very happy to end up anywhere above the 10.90% of the graph I displayed.

  • Most Pessimistic Case: This calculation is based on the lowest normal P/E multiple of the last decade which was 14.4 over the last 9 years:

2015_JULY_FG_ETN6_Here I’d realize a total annualized return of 10.83% through 2017, which is not very pessimistic and instead quite impressive.

  • Most optimistic Case:  This calculation is based on its highest premium normal P/E ratio over the last decade which was a 5 year P/E ratio of 16.2:

2015_JULY_FG_ETN7_This is the best calculated return yet at an annualized rate of 15.89% through 2017.  That’s a solid return for a stock yielding 3.3%.  My investment would double about every six and a half years at that rate which is music to my ears.

Conclusion

Eaton Corporation has all the makings of a fantastic long term investment and meets all of my objectives.  I believe it currently trades for a very attractive price, and I’m super happy to be a shareholder.  I would love to average down on any future weakness and am looking to jump in again if it falls to around the $62 level.  I’m excited to see what Eaton acquires next and can’t wait to watch the new CEO bring Eaton into the next decade.

What stocks are on your radar in July?  What are your thoughts on ETN?

My Dividend Growth

http://www.mydividendgrowth.com

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18 thoughts on “Recent Buy: July 13th, 2015
  1. JC

    Looks solid Ryan! And the pessimistic case is quite bullish so theres no real complaints to be made. Eaton looks like a solid company and if im not mistaken they deal with a lot of efficiency type help for companies which will just continue to be needed in the future.

    I had been looking at UNP, JNJ, HSY and a few others earlier this month but now that the share prices have rebounded im holding off for better prices. Im trying to build up some no doubt core positions for my portfolio.

     
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    1. My Dividend Growth

      Hey there, JC! You nailed it on what Eaton does, they help save businesses so much cash and are always innovating/acquiring new and ‘greener’ ways to do that. This puts me a bit overweight in industrial businesses, but there’s just so much to like and such great value in that sector.

      I was on the same page as you looking to load up and had my list of ‘dream’ businesses I would add should we see that correction or crash everyone was talking about. I’ve already seen several bigger declines in my short investing career, so the hype around this one was truly disappointing. It seems like the market is in a weird place where everyone is overly eager to jump in on even the slightest drop in stock prices. My spider-sense tells me this bull market has a way to run still, but obviously there’s no predicting that.

      Hope all is well in Texas my friend, great to hear from you and have a nice upcoming weekend 🙂

       
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  2. Dave

    I bought 100 shares of ETN, EMR, DE, SJM and JNJ last week. Using them now for covered calls.

    If you like ETN you need to take a peek at EMR.

     
    Reply
    1. My Dividend Growth

      Nice job adding to that forward income, Dave! Good to hear from you again and I think you made some super solid choices there. I researched heavily into EMR and honestly I haven’t been overly impressed. Even the S&P 500 index outperformed it over the last 20 years and lately their fundamentals are declining again. There’s great history there and I think they’re trading at a solid valuation, but I prefer ETN, JCI, PH, UTX, and even GE over EMR. Happy trading and wishing you continued success in investments! Cheers!

       
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  3. Redeemed Finance

    The $10k investing chart when compared to the S&P is really something. An almost 800% growth is great for the dividend and growth investor alike – added to watchlist!
    Rich

     
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    1. My Dividend Growth

      Hi Rich, thanks for commenting! It’s one thing to trump the S&P 500 with a lower yielding / faster growing business, but it’s a whole other story when you can get a starting yield over 3% and expect to do the same. I’d be curious to hear your thoughts after you dig into some research. Have a great weekend ahead!

       
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  4. Dividend Gremlin

    Sweet move. Financials and industrials right now seem wide open for the picking – especially asset managers, Canadian banks, and rail. It simply astounds me, these should be really expensive after all their business is easy to figure out, understand, and profit from.

    It can be tough in a new job, but if you love it and want that career then its worth it. I just did a road trip through Texas for work, it was interesting but tiring. Sometimes you need those work related events or difficulties to remind yourself how much more awesome it will be to achieve FI or a strong safety net so that you can one day choose your projects at will.

    Enjoy that new money,
    Gremlin.

     
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    1. My Dividend Growth

      I’m completely on the same page Gremlin – Financials and Industrials make up over 40% of my overall portfolio, which is a bit high for comfort. I wish I had more room for Canadian banks in my ROTH IRA, I would have loved TD at these levels! I’d like to stock up on other sectors (especially consumer goods) but it’s so hard to justify some of the valuations of the great ones and I don’t want to settle. I’ve got so many years ahead of me to balance it out though, so I’m not at all worried.

      I appreciate the support on the job front and I’m sending it right back at you. It’s hard to accept that we’re forced to keep working, but every little bit we can do to get ahead moves us that much closer to the magical crossover point. I can’t wait to get better at my job and be at the top of my game right around the time I’m FI, then it’s all on my own terms like you said.

      I’m eager to see where your new capital goes next my friend, always good to hear from you and talk soon!

       
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  5. roadmap2retire

    Great writeup and also a great purchase, Ryan. Companies that have their fingers in so many pies and just work behind the scene making the world go round – thats the kind of business I love and want to invest in.

    Glad to hear that your new job is challenging and you are liking it. Thanks for sharing

    Keep up the great work, buddy
    R2R

     
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    1. My Dividend Growth

      Compliments always mean a ton coming from you, R2R. You set a great example over there on how to do write about DGI 🙂 I can’t agree more about theses BTS businesses, I plan build these into large positions and want to add several more names to the mix eventually. I wish I had more capital!

      I appreciate the support on my job situation too. It’s a catch 22 in that I’m loving doing more detailed work and switching things up, but it’s taking a bit of a toll on my tiredness… I probably just need to sleep more! Keep at it yourself over there, you’re a true inspiration and friend!

       
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  6. Vivianne

    I was wondering where you were, it’s been awfully quiet over here. Glad you’ve enjoyed stepping up to get that increase in pay. For the next 2 months I won’t be able to buy anything if my offer for an upper fixer go through. I’ll add this in my stock pile once I have everything situated.

     
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    1. My Dividend Growth

      I’m here! I’ve been super busy with long hours this last week. I’m the only post editor / producer on this show until January, so my plate is very full. It’s lonely too because they rented an empty post house for me to work out of and I’m pretty much the only one here all the time. It gives me a good chance to focus though and steamroll through the work.

      That’s awesome that you’re locking in on a new investment property! I’m very jealous! I’d love to get to the point where a rental property is less than 10% of my assets, but I don’t see that happening any time soon at all. Here’s wishing!

      Looking forward to hearing more about your adventures over there 🙂

       
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  7. The Dividend Drive

    Nice buy, Ryan.

    As you say, the dividend history is very impressive seeing as it is in such a cyclical industry. The yield is pretty good as well!

    I recently picked up some shares in an engineer myself, Rolls Royce. However, they are slightly less cyclical thanks to a combination of their role in defence, aerospace and their services provision.

    Good luck with this one. Should be a great long-term investment.

     
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    1. My Dividend Growth

      Nice pickup there, DD! I always thought it was so cool how RR transitioned into such a diverse business and think you made a very solid choice. I’m sending good vibes your way on that one and will dig in myself to take a further look! Great to hear from you and I hope you have a nice weekend over there 🙂

       
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  8. Dividend Diplomats

    MDG,

    Great purchase! Love that you picked up a northeast ohio company – the bias sits in yet again! I like what you did here, great addition to your income stream and it’s sweet you’re almost at $200/month going forward, so damn close. Keep the investing bud!

    -Lanny

     
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    1. My Dividend Growth

      Thank you Lanny! Their roots will always be in Ohio, even if they technically relocated to Ireland. I’m a big fan of ETN and can’t wait to see where they are in 5 years. You’ve been doing some great work over there yourself with excellent purchases. Keep up the good work and great to hear from you.

       
      Reply

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