Stock Purchase 12/30 – ROK

The Lord knows I couldn’t stay behind the scenes or on the sidelines for this long, as it has been quite some time since I made a full on stock purchase.  I was itching for an action and I knew the end of the year was coming and wanted to go out with a “bang”.  I woke up on December 30th, after having analyzed the stock market the day before and knew what I was after and it was in a different industry that I have not truly been exposed to before.  Enough with the opening, let’s dive into my recent stock purchase and find out what, why and how much!

RockwellAutomation_logo

Stock Purchase

On December 30th, 2014 I purchased shares into Rockwell Automation Inc. (ROK).  To begin, they are within the Industrial sector with competitors listed such as Honeywell and General Electric.  ROK is a provider of industrial automation power, control and information solutions that help manufacturers achieve a competitive advantage for their businesses with two segments of operation – Architecture & Software and controls Products & Solutions.  As Bert described in his portfolio review assessment in bulking up and adding different industries – the industrial sector is not an area where I had any exposure really.  The company had great metrics when I was reviewing their financial statements and I also had a family friend that worked there, so when this stock came on a blip on a screener, I was interested in the guts.  I used a combination of our Dividend Diplomat stock screener, the comparison of yield to 5 year yield average and the dividend growth rate impact.  Let’s see why I bought Rockwell.

The Analysis

    1. To begin, their Dividend yield at the time of purchase was a solid 2.31%.  This is above the S&P yield of approximately 1.85% and also is greater than Honeywell’s 2.05% but less than GE’s 3.6%.  However, you will see why I like Rockwell’s dividend out of these 3 companies. This passed my dividend yield check, so I was happy to move on from here.
    2. Further, the payout ratio on ROK’s dividend at $2.60 per share over their expected 2015 EPS of $6.71 = 39%.  This is well below my 60% mark I like and is also above 20%, essentially right in the middle.  This is comparable to an estimated 38% of Honeywell’s and far less than an estimated GE payout ratio of 56%.  Green light here for me and similar to point 1 above, Honeywell had a slightly lower payout but also a lower yield and GE’s is approaching the ceiling of 60%.
    3. 5 Year Average: Rockwell’s 5 year dividend yield average is roughly 2%, therefore, at 2.31% was higher than it’s historical yield, which also eludes to a better valuation standpoint, which leads into the P/E ratio.
    4. P/E Ratio – based on the forward looking 2015 EPS of $6.71, the stock price at my purchase was $112.14, therefore was 16.70.  Not as low as I’d like, but much lower than the S&P P/E ratio.  Honeywell’s P/E was around 18.1 and GE’s ratio around 15.35.  Therefore, ROK fell in between, but I liked the EPS growth horizon better for Rockwell when compared to the other 2, as analysts are estimating that EPS of $6.71 will grow to $7.37 in 2016, or roughly a 10% EPS growth, with GE’s at 6% projection and Honeywell’s at 10% as well.
    5. Dividend Growth Rate – ROK’s 5 year dividend growth rate was off the chart at 15.6%.  Coming in with a good metric as well – GE & Honeywell both had approximately 9-10% 5 year dividend growth rate averages.  Rockwell took the cake with this one and the most recent year grew at 14.35%.  Therefore, this passes my 10% combined metric area in my portfolio review assessment that will come out soon, as yield of 2.31% + 14.35% = 16.66%.  This also is greater than my weighted average dividend growth rate of 7.05%, but does bring down my overall yield, as the average for my individual portfolio was roughly 3.88%
    6. Shares outstanding at 9/30/13 = 138,660,664 and by 9/30/14 = 135,771,159.  Not huge, but that is a $2,889,505 decrease or a 2% decrease to total outstanding shares.  I expect this trend to continue if shares are undervalued to the company and a way to ensure an increase to EPS, as I recently explained in why share buy backs are important to dividend investors.
    7. Additionally, the Current & Quick Ratios of the company were phenomenal.  The Current ratio stood at a solid 2.3 (as if it is over 1 means their current assets can be liquid to pay off current liabilities).  When removing inventory, the quick ratio stands at 1.97 – which is again above 1, meaning that short-term more liquid assets such as A/R, Cash, investments – can be redeemed to also cover the short-term liabilities.

Conclusion and Summary

I purchased 18 shares of Rockwell Automation (ROK) at a price of $112.14, to which this adds $46.80 to my annual projected dividend income.  I am pumped to see what this dividend growth stock can do in the future for me, as there is plenty of room due to the low payout ratio to continue to grow the dividend, as well as areas where they can improve earnings per share that will allow the dividend growth.  Rockwell shows to me that it has a liquid balance sheet, solid earnings growth, potential for share repurchases and sales growth has been positive.  This moves my weighted average dividend growth rate up to 7.16% or by 11 basis points and pushes my estimated/projected 2015 income to $5,062.32.  Phew – had to go out with one last stock purchase before this year closed, that’s for sure!

What does everyone think of this purchase?  Do you own Rockwell or a competitor that isn’t GE?  Any faults or downsides to this purchase?  Thanks everyone, would love the input and talk soon — Hope you all had a Happy New Year from the Dividend Diplomats!

-Lanny

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14 thoughts on “Stock Purchase 12/30 – ROK

  1. Interesting buy, Lanny. Ive seen ROK mentioned very rarely in the DGI circles, and theres not much that I know about it. Thanks for profiling the company and sharing the numbers and your take on it. I will need to have a look at it closely to better understand what they do. Will be reading up on it.

    cheers
    R2R

    • R2R,

      Thanks for coming by! It is a very quiet/rare read from the DGI community, as I’m not sure anyone else owns them? Hopefully I threw a little zinger out there for everyone to come and read about them. Very focused on shareholder return, being sound in their continued growth with a very sound balance sheet to boot as well. I am excited about them without a doubt.

      -Lanny

    • Henry,

      Great point out. Revenue only increased 4.3% from prior year. My thoughts are they have had periods in the past where they had slow rev growth (2009-2010) and periods where it was astounding (2006-2008 and 2010-2012). EPS obviously has been jumping quite a bit with their dividend tagging along with it as well. I believe that management is dedicated to giving back to shareholders, as they increased the div twice in 2013 and a hefty jump in 2014. I’m excited for the smaller company in the industrial field to gain some traction. Any thoughts??

      -Lanny

    • Tawcan,

      Not many people probably have come across “the rock” to be honest. I think Bert had to change his underwear after I purchased them, as he didn’t know much either. The growth at the top isn’t large for the last 3 years, and they are only expecting somewhere in between 2.5-6.5% or approximately a 4% similar growth is my expectation as they go through a pattern within their environment. They’ve had great years of rev growth (2010, 2011; 2006-2008) and have had slow years during their time (2009-2010; 2012-2014). However, they continue to hit record figures and returning quite a bit back to shareholders lately and they seem to truly emphasize this. With EPS at a growth rate of over 10% expectation set by management for 2015, I like where the dividend potentially is headed. Thoughts?

      -Lanny

    • Caza,

      Thanks for coming by! GE is great, I wanted to step outside the box with a different investment that I felt was more appropriately valued at the time with a great history of dividend growth recently, especially paired with ample room to continue to grow this forward, as well as a great share buy back program. I do like GE as well!

      -Lanny

  2. Nice article, I really like your technical breakdown. That is exactly the sort of stuff I need to and will learn this year. I had never heard of this company, or maybe I seen the ticker, but didn’t look into them. I like that they pass your screening, but the fact that both Henry and Tawcan pointed out the flat revenue growth would have me concerned. What are your thoughts about this?

    – HMB

    • HMB,

      Thank you for the comment and roll by! As with all companies going through cyclical matters – it seems as though ROK may be going through their own, however with still small 2.5-6.5% projected sales growth for 2015. Last year had a small 4.3% sales growth but if you rewind a few years back, they had a year of sales growth of 12.11%, followed by a year of 23.54% sales growth. They will continue to grow as they become a bigger player, but I am also very focused on the EPS figure, as they are able to continue with share re-purchases, if they so choose to do so, as well as a low (below 40% payout) currently. EPS is expected to be in between $6.50 and $7.00 which is very strong growth compared to 2014 of $5.91 = decent earnings growth. Will there be growth? Yes – I expect it to be around the 4% growth that they have had for the next 2 years roughly as the macro environment evolves further.

      -Lanny

      • Ok, that makes much more sense. I think the fundamentals are there and robust revenue growth is just one of the metrics, not the most important. To me, some growth is better than none. Pays dividends while you wait for revenue growth? Great! Seems like a sold buy. I wish you luck!

        – HMB

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