America’s favorite bespectacled value investor, Warren Buffett, made one of the largest deals in Berkshire Hathaway (BRK.A, BRK.B) history. Buffett paid a whopping $37 billion — if you include assumption of debt — for aerospace and automotive industrial giant Precision Castparts (PCP). The deal strengthens Berkshire’s vast and growing industrials portfolio.
As the historic foundation of America’s economic growth, most industrials have been churning out stable returns and dividends for years. And for some of America’s industrials that stretches for more than a century. That’s the kind of stability that investors should be looking for when it comes to securing a great foundation for their own portfolios. And it’s exactly what Buffett was looking for from PCP. Precision will continue to throw off plenty of cash flows tucked away inside BRK.
Meanwhile, there’s plenty of growth to be found among the industrials. Lower energy and materials costs have jump-started the trend of onshoring — or bringing heavy manufacturing jobs back to American soil. This, plus a hefty dose of innovation and a move towards high-valued/heavy engineered goods, has helped the industrials regain their mojo.
All in all, that’s great news for industrials going forward. It’s even better news for investors looking for stability, growth and income.
To that end, here’s three industrials to buy today.
Invest Like Warren Buffett With Industrials: Parker-Hannifin (PH)
Founded in 1918 as producer of pneumatic braking systems for trucks, Parker-Hannifin (PH) has grown to become one of America’s largest industrials. Today, PH’s product line spans everything from electric grid convertors and power systems to hydraulic pumps and air conditioning units. That breadth of products has allowed it to weather some pretty nasty economic storms over the course of its history.
And one of those storms could be happing now.
Parker is a very internationally focused firm, operating in over 50 countries. This is currently a big problem. Thanks to the strong dollar, PH’s latest earnings report showed a drop in profits as well as sales. PH stock is down about 13% this year.
However, investors shouldn’t get too wrapped up in the recent issues at PH. Cash flows at the industrial firm actually nearly doubled versus last quarter. And PH has a huge history of returning those cash flows back to investors. Parker has one of the longest-running dividend-increase records in the S&P 500 index — currently at 58 consecutive years. That streak should continue as the industrial’s “Win Strategy” agenda focuses on more dividend and cash flow increases.
PH stock can currently be had for a price-to-earnings ratio of just 16 and dividend yield of 2.2%.
Invest Like Warren Buffett With Industrials: Snap-on Incorporated (SNA)
Selling screwdrivers, wrenches and other hand tools may not seem that exciting, but for Snap-on Incorporated (SNA) it’s a cash cow. SNA manufactures a variety of tools, equipment, diagnostics and repair information systems solutions for professional users worldwide. Many mechanics swear by SNA’s products and at around $284 per tool, it provides plenty of revenues for the industrial.
But the firm isn’t just a manufacturer of socket sets.
As automotive manufacturers have added a host of computer systems to cars and trucks, SNA has continued to plow head-first into a variety of high-tech automotive diagnostics equipment. This higher cost and higher margin products are becoming standard in every garage and repair shop. Snap-on has benefited from its industrials business, which serves the aerospace and heavy construction sectors. Both sectors have seen rising sales in recent quarters.
Adding to SNA’s appeal has been lower input costs. Both prices for steel and natural gas continue to fall, boosting Snap-on’s already healthy margins.
Those margins have SNA one heck of a dividend grower. Snap-on’s current yield is only 1.3%, but over the last five years, the firm has managed to grow its dividend by 12% annually. That level of increases should continue, especially when considering its payout ratio is less than 30%.
Invest Like Warren Buffett With Industrials: Cummins (CMI)
Founded in 1919, Cummins (CMI) is the world’s largest manufacturer of diesel engines. That includes engines for your pickup truck to large industrial engines used in backup electricity demand. The firm also produces a full line of fuel systems as well as filtration products for various engines. These diesel engine-related businesses keep the lights on and deliver steady cash flows.
But CMI has some pretty exciting ventures as well.
Namely, it’s forays into alternatives. To start with, CMI is plowing headfirst into natural gas-based engines via its joint venture with Westport Innovations (WPRT). With our abundant supply — thanks to fracking — natural gas is quickly getting the nod from fleet operators as the fuel of choice to power their trucks. CMI is on the forefront of providing the equipment needed to run those fleets on CNG.
And speaking of fracking, CMI has developed a host of engines designed to run on flare gas from oil and gas wells. That will allow drillers to use the waste gas to power equipment and cut costs.
All of this has added extra “oomph” to CMI’s steady nature. Cummins’ has managed to increase its dividend over the last 25 years, but the last few years have seen some of the largest increases. CMI stock currently yields 3.1%, but investors can buy that yield at an extremely cheap P/E of 13.