I often have the feeling that we are forgetting about the industry. There is nothing sexy about them. Often there is only minimal impetus to generate hype on the stock market. Worse, this sector is not seen as a source of high dividend yields. Because many industries operate in unique business cycles, there are always some industries up for sale.
Many industrial companies are over 50 years old. This is probably one of the few sectors where you can list many companies that have survived an entire century. Due to their long history, they have built solid core businesses and achieved impressive brand awareness. Those who have stood the test of time and found ways to evolve often pay solid dividends.
Barriers to entry are numerous in most industries in this sector. It is quite difficult to get military contracts or railroads built for a new, inexperienced company. Most industrial companies are large companies that invest heavily in research and development and operate enormous facilities around the world. Since many industrial companies are old-fashioned companies, you can often pick a company that has weathered the last three recessions and kept the dividend alive as well. This is great evidence of time and relief when going through a challenging phase in the market.
Many industries will also enjoy repeating contracts or sales. While aggregate demand fluctuates to keep up with the economy, these companies can often count on solid core demand from their customers. In many cases, they operate sticky business models. Industrials will develop extensive know-how in niche areas and offer its customers tailor-made solutions. This makes the changeover costs significant if your entire company is tied to services or products that were developed jointly with your suppliers.
Probably the biggest problem with industrials is the fact that they often get too big to be managed effectively. We are all aware of the multiple issues at General Electric (GE), which had to cut its dividend twice between 2008 and 2018. In other words, a company’s longevity is not necessarily an accurate indicator of its likelihood of paying its dividend or increasing its dividend.
The other characteristic that industrial companies should track is their size and level of debt. Companies that have existed for a long time usually grow in different segments and business areas. At one point you look at the company and it becomes difficult to understand where the real expertise is. This is what happened to GE.
The industry has to invest massively in research and development as well as in the construction of its plants. When demand slows, the company often has idle machines and resources at its disposal. These are costly moments.
How to make the most of it
Trends! Industrial stocks are likely to follow cycles. Railways, construction equipment manufacturers, trucking manufacturers, and trucking will be quite busy during the economic boom, but suffer during recessions. If you keep a close eye on a particular industry, you can catch great companies when their share price is devalued by the market.
There are several fragmented markets where a leader will make acquisitions to increase their market share. You can either target smaller players with low debt or go for the big player looking to consolidate their position.
The industrial sector is best for growth investors, but you can often find solid candidates for high-income investors.
Lockheed Martin (LMT)
- Market capitalization: 95B
- Yield: 3.05%
Lockheed Martin is the world’s largest defense company and has dominated the Western high-end combat aircraft market since the F-35 program was awarded in 2001. Lockheed’s largest segment is aviation, which is dominated by the massive F-35 program. The remaining segments of Lockheed are rotation and mission systems, which are primarily the Sikorsky helicopter business. Missiles and fire control that create missiles and anti-missile systems; and space systems that produce satellites and receive capital income from the United Launch Alliance joint venture.
LMT now benefits from more generous international sales regulations. With geopolitical tensions increasing around the world, Lockheed Martin is in a great position to offer its products to other countries. LMT is confident that its F-35 fighter program and missile defense systems will grow in the years to come. The company is closely associated with the US government and provides high quality defense products. There are very few competitors in these markets and LMT is rapidly increasing its order book. LMT is currently paying off its debts and has stronger cash from operations. What is not to like?
TFI International (TFII.TO) (TFII)
- Market capitalization: 8B
- Yield: 1.30%
TFI International Inc is a transportation and logistics company based in Canada. The company is divided into four segments: parcel and courier, less than truckload, truckload and logistics. The parcel and courier segment collects, transports and delivers items throughout North America. The segment less than truckload transports smaller loads. The truck load segment transports goods with flatbed trucks, containers or via more specialized services. The company offers general logistics services through the logistics segment. TFI International generates most of its revenue in Canada, with the US being the second most important source of income.
As TFI expands, it may be time to jump in their truck and drive them for a while. Expanding outside of Canada was the smartest move as both the US and Mexican economies have great potential. With a larger fleet, TFI will be there in the future to capture the steady growth available. Investing in a leader in Canada and North America as a whole is a safe bet for anyone building a dividend growth portfolio. The company shows appetite for further growth through acquisitions in the coming years. The latest move (UPS Freight) will result in over $ 3 billion in revenue. The share price rose on this news.