by Marc Bastow | October 24, 2012 7:30 am
For investors needing retirement stocks in their portfolios, one rule stands out, especially in times like these with the recent tumbles and dips: Slow and steady wins the race.
Now may just be a great time to buttress damaged portfolios with names beyond the usual (and worthwhile) stalwarts such as Exxon Mobil (NYSE:XOM), Johnson & Johnson (NYSE:JNJ) and Coca-Cola (NYSE:KO).
What we’re looking for are names within an industry that are perhaps a bit down on disappointing news, but not the kind that might sink the boat. We need to find stocks where the drop in price provides a nice entry point, and very nice, steady dividend yields.
So, where should we go prospecting? Well, how about in the machinery, farming and engine businesses? The overall machinery and power technology industry is certainly staggering a bit, as companies retool their earnings guidance based on a multitude of factors. Among them: falling worldwide commodity prices and demand, drought in the U.S. heartland and abroad, and the dicey economy in China — with far worse in Europe.
But don’t despair. These conditions also creating some good buys for your retirement portfolio. I can think of at least three solid players, all of which will reward your patience: Caterpillar (NYSE:CAT), Deere (NYSE:DE) and Cummins (NYSE:CMI).
Let’s take a look:
As the world’s largest producer of heavy equipment, Caterpillar is in a unique position as both market leader and industry bellwether. CAT announced strong third-quarter earnings on Monday, posting EPS up almost 50% from second quarter, with sales up 9% in North America and 8% in Asia on a quarter-over-quarter basis. Sounds great, right?
Well, yes. But Caterpillar also announced lowered guidance for the year and almost into 2015. The company is looking at much slower growth based on a global economic expansion rate of 2.5%. So, while the stock rose a tad after a quick drop, it’s still trading well below it’s 52-week high.
Here’s the good news: CAT pays a dividend of 52 cents per quarter with a 2.44% dividend yield, on a stock trading at a measly 8x trailing earnings. CAT has paid a dividend since 1914, and despite the current slowdown, that history should continue.
Deere (NYSE:DE) is the world’s largest farm machine producer (notice the pattern?), and it’s also big in construction and earth-moving equipment. Deere missed earnings estimates in the third quarter by nearly 17%, and won’t announce fourth-quarter results until November. But like CAT, it telegraphed lowered expectations for fiscal 2012, with net income expected to come in around $200 million below analyst estimates.
Deere generates nearly 60% of its revenues from the U.S. and Canada, but it’s trying to get into China, Brazil and India, markets where tractor usage isn’t nearly as widespread as in North America. The problem is that, at least in the case of China, the economy is slowing. But the bottom line is people need to eat, and tractor technology can make large-scale crop and food production more efficient.
So, while you wait for these markets to ripen, Deere will provide you with a dividend of 46 cents per share per quarter, and with a P/E of 11x trailing earnings and a 2.14% dividend yield, it’s a good time to take a nice long look.
An InvestorPlace Real America Index component, Cummins (NYSE:CMI) is the world’s leading (there’s that moniker again) diesel engine manufacturer, which also happens to manufacture power-generation equipment like generators, both small and humungous.
Like the other two companies, Cummins came through its most recent earnings release a little bit wobbly, warning investors that it expects revenue to be approximately $17 billion compared to previous guidance of $18 billion. It also estimated EBIT to be approximately 13.5%, compared to prior guidance of 14.25% to 14.75%.
CMI has basically acknowledged that growth will be slow, and it’s taking steps to reduce costs, including planned work-week reductions, shutdowns at some manufacturing facilities and targeted workforce reductions of up to 1,500 employees by year-end.
The stock is trading well below its 52-week high of nearly $130 per share. With the warnings weighing on the stock, now is a great time to get in at an entry price of just over $90 a share. Keep in mind that a 50-cent dividend gets you a 2.16% dividend yield. Not too shabby for a 9x trailing earnings opportunity.
One caveat: It might pay to wait just a little bit more because Cummins announces earnings on Oct. 30, and a bigger window might open soon thereafter.
Marc Bastow is an Assistant Editor at InvestorPlace.com. As of this writing he is long XOM and JNJ.
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