Industrial stocks may not be the most exciting companies to buy, but in a volatile market like this one, excitement isn't always a good thing. What many industrials do offer is low-key but reliable performance, saving the excitement for their dividend payouts, which can be well above average.
Three high-yielding industrials that are looking strong in light of their second-quarter 2020 results are Brookfield Infrastructure Partners (NYSE:BIP), Dow (NYSE:DOW), and Stag Industrial (NYSE:STAG). Here's why you might want to put these boring yet impressive outperformers into your portfolio -- and their dividends into your pocket.
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Resilient cash flows
Things were tough all over the stock market in Q2 2020, and it was the rare company that even came close to maintaining its Q2 2019 performance. One company that did so in many ways was master limited partnership (MLP) Brookfield Infrastructure Partners. For example, its revenue increased 15.5% year over year, to $1.9 billion.
As Brookfield's CFO Bahir Manios put it on the Q2 2020 earnings call: "While many industries have been hard-hit, the infrastructure sector has demonstrated one of its most coveted characteristics, being its highly resilient cash flows." Sure enough, Brookfield churned out $333 million in funds from operations in Q2, which was down just 1.2% from Q2 2019. That number would have been $30 million higher -- and a 7.7% gain over the prior-year quarter -- if not for unfavorable currency effects due to depreciation of the Brazilian real. That resilient cash flow supports the MLP's generous distribution, currently yielding 4.7%.
Management sees opportunity in the current economic environment, and plans to sell some mature assets for an expected $700 million, while keeping an eye out for bargains in distressed sectors like U.S. energy transportation and storage. Now looks like a great time to hop on board this outperformer.
Making diversification work
Businesses have trended away from diversification in recent years. Once seen as a way to protect against weakness in one business unit, excess diversification is now often faulted for weighing down companywide performance. For example, slumping industrial conglomerate General Electric has pared down its once-sprawling portfolio into just four core businesses (it hasn't helped much).
The diversified chemical and materials companies Dow and DuPont (NYSE:DD) recently streamlined their businesses through a unique merger-and-split arrangement. They combined to form DowDuPont in 2015. In 2019, they spun off Corteva as an agricultural science pure-play, and split the rest of the portfolio between themselves.
Dow kept the "performance chemicals" portfolio, which consists mostly of industrial chemicals like lubricants, adhesives, paints, and coatings. The thing is, despite this streamlining, Dow's portfolio is still quite diversified, and it's helping the company outperform.
In Q2 2020, some of Dow's sales suffered due to the pandemic. Sales of big-ticket items like new homes, furniture, and cars plummeted, and so did sales of the industrial chemicals used to make them. However, sales of cleaning and disinfecting products, which also use Dow's chemicals, increased. As more people began cooking at home, food packaging demand went up. And even though professional construction chemical sales dropped, do-it-yourself home improvement rose, which benefited Dow's paints and coatings businesses.
This diversified portfolio allowed Dow to outperform expectations, and to generate plenty of cash to fund its dividend, currently yielding 6.7%. Dow looks like an excellent buy right now for income investors.
A bet on e-commerce
E-commerce exploded in the U.S. as stay-at-home or similar orders affected more than 90% of the U.S. population this spring. And e-commerce intersects with the industrial sector in one important place -- the warehouse.
Warehouses and distribution centers are critical for e-commerce companies, and as more retailers beef up their online sales, demand for these facilities should see tremendous growth. That growth was already boosting industrial real estate investment trust (REIT) Stag Industrial in Q2 2020. Stag owns industrial properties used for manufacturing, warehousing, and distribution across the country.
Unlike other industrial REITs, Stag has deliberately avoided expensive metropolitan areas like New York City, preferring to buy cheaper properties in smaller cities and markets. That strategy paid off in Q2: Stag signed an 11-year lease for a 350,000-square-foot building in Taunton, Massachusetts -- about 40 miles south of Boston -- to an unidentified "dominant e-commerce tenant." It also leased a 250,000-square-foot building in Burlington, New Jersey -- about 20 miles northeast of Philadelphia -- to another (or maybe the same) unidentified "dominant e-commerce tenant."
Perhaps relatedly, on the Q2 2020 earnings call, management revealed that Amazon was now the company's largest tenant, accounting for 2.5% of Stag's revenue, up from 1.9% in the first quarter. When you're in the distribution center business, that's a good tenant to have.
With a 4.3% dividend yield and more property acquisitions expected in the second half of the year, now looks like a great time to buy into this unconventional industrial play.
Boring can be exciting
Famed investor Peter Lynch liked to buy boring companies. He believed they were often overlooked by the market and could thus be good bargains. Brookfield Infrastructure Partners, Dow, and Stag Industrial, with boring-but-reliable business models and above-average dividend yields, may not make for great cocktail party conversation, but they should add value to your portfolio. And that should be excitement enough for any investor.
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August 10, 2020 at 08:27PM
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3 Top Industrial Stocks to Buy Right Now - Motley Fool
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