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What are we looking for?

U.S. capital goods producers paying dividends.

The screen

Despite the effects of hurricanes Harvey and Irma, U.S. capital goods orders (producers of goods such as buildings and machinery, used to produce other goods) have increased more than expected, perhaps underpinning strength in the U.S. economy.

This week, I use Morningstar CPMS to create a strategy that looks specifically in this industry and ranks stocks based on:

  • Yield on expected dividends (here we used what the company has announced that they will be paying, but have not yet paid);
  • Five-year growth rate of dividends (on average, by how much dividends have grown each year over the past five years);
  • Five-year earnings-per-share growth rate (on average, how much EPS has grown each year over the past five years);
  • Annual cash flow momentum (latest four quarters of operating cash flow, compared against the same figure four quarters ago).

Only capital goods producers were considered in this analysis (today, there are 200 companies within this industry in the Morningstar CPMS U.S. database). In order to qualify, companies in this industry must have a debt-to-equity ratio less than 1 to avoid overly leveraged companies (this figure represents the bottom one-third of companies in the capital goods universe).

More about Morningstar

Morningstar Research Inc. provides independent investment research in North America, Europe, Australia and Asia. Its research tool, Morningstar CPMS, provides quantitative North American equity research and portfolio analysis to institutional clients and financial advisers. CPMS data cover more than 95 per cent of the investable North American stock market. With more than 110 equity and credit analysts, Morningstar has one of the largest independent institutional equity research teams in the world.

What we found

I used Morningstar CPMS to back-test this strategy from December, 1998, to August, 2017. During this process, a maximum of 10 stocks were purchased within the capital goods industry. Stocks were sold if their rank fell below the top 35 per cent of our universe. When sold, the positions were replaced with the highest ranked stock not already owned in the portfolio. Over this period, the strategy produced an annualized total return of 9.7 per cent while the S&P 500 industrials total return index produced 7.3 per cent. Over the same time period, the broad S&P 500 total return index produced 5.8 per cent.

As always, it is recommended that investors conduct their own independent research before purchasing any of the investments listed here.

Ian Tam, CFA, is a relationship manager for CPMS at Morningstar Research Inc.

Select U.S. capital goods producers

RankCompanyTickerMarket Cap ($Mil U.S.)Yield (%)5Yr Div. Growth Rate (%)5Yr EPS Growth Rate (%)Annual CF Momentum (%)D/E Ratio
1Watsco Inc.WSO-N 5,682.0 3.1435.9015.256.770.30
2Fastenal Co.FAST-Q 13,028.1 2.8314.735.6411.410.22
3United TechnologiesUTX-N 91,635.2 2.445.634.2830.600.79
4Ingersoll-Rand Co.IR-N 22,513.0 2.0320.007.0121.980.55
5Snap-On Inc.SNA-N 8,616.4 1.9017.5315.6117.600.26
6Hubbell Inc.HUBB-N 6,285.9 2.4412.122.748.060.43
7Lincoln Electric HoldingsLECO-Q 6,018.6 1.5316.320.4024.390.83
8Toro Co.TTC-N 6,637.4 1.1427.9217.5217.800.47
9Honeywell Intl Inc.HON-N 106,662.2 1.9013.318.535.010.55
10Parker-Hannifin Corp.PH-N 23,160.6 1.5211.441.2826.880.92

Source:  Morningstar Canada