Although their payouts tend to be above average, income investors don’t buy Dividend Aristocrats just because they pay well. The fact that a company has increased its dividend every year for at least 25 consecutive years is also proof that it is a growing company with reliable profits and cash flow and that it can increase its dividend in good and bad times.
This description fits Raytheon Technologies (RTX 0.88%), Emerson Electric (EMR -0.96%)and Roper Technologies (ROP 0.79%) to a T, and these three industrial stocks have even more exciting growth prospects in 2023. Let’s find out what these three stocks have planned.
2022 has been a curious year for aerospace and defense giant Raytheon. Management began the year expecting solid increases in profitability from its commercial aerospace businesses (Collins Aerospace and Pratt & Whitney) and solid increases in earnings from its defense-focused businesses (Raytheon Intelligence & Space or RIS, and Raytheon Missiles & Defense or RMD).
However, a lot can happen in a year, and Raytheon will enter 2023 in a slightly different shape.
- The recovery in commercial aerospace has been stronger than expected in 2022, and Collins and Pratt & Whitney will generate more profits than initially expected.
- Supply chain pressures, component shortages and a tight labor market have continued through 2022, and the first two have been exacerbated by the war in Ukraine. Therefore, RIS and RMD will generate lower profits in 2022 than they did in 2021.
- Geopolitical conflicts and the need to replace the equipment they donated to Ukraine’s defense have forced governments around the world to increase their own defense spending. Management expects Raytheon’s defense-related revenue to grow at a mid- to high-single digit percentage rate through 2025.
Thus, investors can expect continued strong growth at Collins and Pratt & Whitney. Meanwhile, even though the short-term picture is weaker at RMD and RIS (due to supply chain issues), the medium-term outlook looks better. Assuming a gradual easing of supply chain pressures, RMD and RIS should be able to start better executing their backlogs in 2023.
Everything points to excellent profit growth for Raytheon in the coming years.
2. Emerson Electric
One of the current themes in the industrial sector involves conglomerates shedding non-core units to focus on their core businesses – and in Emerson’s case, that core business is automation. It is a strategy that Siemens and ABB are also continuing – both companies sold or started businesses to increase their overall exposure to the automation and industrial software niches.
Automation is an attractive market today as it helps companies move production out of countries with low labor costs – a key consideration for manufacturers given the constraints on the global supply chain these last years. Additionally, advances in digital technology and industrial software (i.e. the Internet of Things) are enabling significant productivity improvements through automation.
Emerson tried to buy an American peer Rockwell Automation in 2017 to expand its presence in the automation market. After Rockwell rejected that offer, Emerson instead embarked on a more gradual transformation – first buying software technology company Open Systems International in 2020, then bringing in all of its industrial software business and $6 billion. in cash for a 55% interest in AspenTech in 2022.
This transformation process continued with the announcement last month of an agreement to sell the majority of its climate technology business to black stone.
Emerson will enter 2023 as a company focused on growing its automation business organically and through acquisitions, and investors can look forward to years of profitable growth.
Until 2015, Roper Technologies was known as Roper Industries. Its name change reflected the company’s move toward application and networking software. Among other things, this resulted in an agreement to sell a 51% stake in its process technology segment and industrial business to a private equity firm in 2022.
The proceeds of $2.6 billion from this transaction and its continued cash flow generation will enable Roper’s management to do what it does best: acquire asset-light businesses operating with high profit margins in niche activities. Although these companies are integrated into Roper, this tends to allow previous management to continue to manage them, although capital allocation decisions are made centrally. Cash flow from these acquisitions is then used to pay dividends, reduce debt and help fund further acquisitions.
This is a very successful business model that has resulted in exceptional returns for investors. The stock has risen about 300% over the past decade.
Roper’s management has already entered the next phase by agreeing to a $3.7 billion deal to buy school administration software company Frontline, and it has an additional $4 billion in firepower to acquire more businesses.
If history is any guide, Roper’s strategy will likely result in even higher returns than the market as it hits the acquisition track.
Lee Samaha holds positions within Siemens Aktiengesellschaft. The Motley Fool holds positions and endorses ABB, Blackstone Inc. and Emerson Electric Co. The Motley Fool endorses Emerson Electric and Roper Technologies. The Motley Fool has a disclosure policy.