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!
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.
- 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.
- 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%.
- 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.
- 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.
- 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%
- 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.
- 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!