Industrials have soared over the past year, with the sector gaining nearly 20% despite a recent decline. Buying companies like Eaton (NYSE:ETN) And Emerson Electric (NYSE:EMR) Today it would mean paying top dollar, or at least close to it.
The valuations here make perfect sense as both are well positioned for the future. However, the sharp recent decline in the industrial sector makes it clear that the market can become a little irrational at times, which could create better long-term buying opportunities if the stock market declines more sharply. Here’s why these two stocks should be on your wish list today.
Eaton manages power
Eaton has a long history in energy management, but the nature of power has changed over time. It started over 100 years ago in the vehicle sector.
Today, around 70% of sales come from the North American and global electrical business. It sells products to manufacturers and construction companies that want to control the way electricity is used in their products and buildings. The company also produces products for the aerospace industry, the internal combustion engine sector (which is something of a relic from the company’s past) and, more recently, electric vehicles.
The big story here, however, is that energy management is an increasingly important issue in a world focused on environmental protection. There are two sides to this story.
First, there is increasing demand from new categories such as electric vehicles and solar and wind farms. But there’s a second benefit: Companies are trying to make better use of the electricity they’re already using. This can be to improve the energy consumption of buildings or to reduce the energy consumption of a specific device, be it a car or a lighting system. Eaton can help in all areas.
The exciting thing is that Eaton has a huge order backlog, which shows the huge demand in this area. At the end of the fourth quarter of 2023, backlog was $9.5 billion, up from $2.8 billion in the same quarter of 2019. The company’s ongoing business transformation is clearly paying off.
However, the dividend yield today is only 1.1%. That’s near the lowest level in decades, but a sell-off in stocks could cause yields to return to attractive territory. A yield above 2.5% would likely be a very good entry point and worth the wait for value-oriented, long-term dividend investors.
Emerson automates the future
The story of Emerson is similar to Eaton’s, only with a slightly different focus. Emerson has divested itself of older businesses (e.g. sink disposal) in recent years to focus on automation. While Eaton enables companies to manage power more efficiently, Emerson helps customers manage their broader business processes more efficiently. As technologies such as robotics and the Internet of Things advance, the ability to see and control all aspects of a business is becoming more technical and important.
The backlog story is similarly attractive. In the first fiscal quarter of 2024, the company had $7.6 billion in future orders. But like Eaton, the stock has performed very well in recent years. The dividend yield is a measly 1.9%, which is also close to its lowest level in decades. Here too, a value in the 3% range would be a more attractive entry point.
Emerson is a dividend king with 67 consecutive annual dividend increases. Such a record is not built by chance, which indicates the long-term direction of the company. That could give investors an edge, considering Eaton’s dividend streak has lasted “only” 15 years, which is still good, but not nearly as impressive.
ETN data from YCharts
Get ready today
The obvious problem with Eaton and Emerson is valuation, with dividend yield serving as a rough guide. So buying today would mean paying the highest price.
But don’t write off the shares. Both companies have prepared for a bright future, which is underlined by their high order books. Learn about both today so you can be prepared to buy while others are selling when the market eventually goes into bear mode. And as the chart above shows, both Eaton and Emerson have experienced multiple declines of 30% to 50% (or more) in the past. If you don’t prepare now, you may lack the courage to go against the grain and add these two industrial stocks to your portfolio when they finally become attractively priced again.
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Reuben Gregg Brewer holds positions at Eaton Plc. The Motley Fool has positions in and recommends Emerson Electric. The Motley Fool has a disclosure policy.
“2 Supercharged Dividend Stocks to Buy if There’s a Stock Market Sell-Off” was originally published by The Motley Fool