This is part of a YCharts series analyzing dividend-payers across all 10 sectors of the S&P 500. The initial article showed readers how to find dividend champs in 10 sectors, followed by articles on dividend stars in the consumer defensive sector, among utility stocks and among financial stocks.
The Industrial sector of the S&P 500 delivered a 10% annualized gain in the first quarter. Normally that would be a lights-out showing, but it was actually just in line with the index average. Still, that a cyclical sector managed to keep up amid the clamor for defensive stocks could be signal that concerns about a global slowdown are ebbing.
Investing in this sector at this juncture is all about positioning for rebounding global output; that might take a few quarters to play out, but in the meantime you’re able to buy in at low valuations.
Using YChart Stock Screener, eight stocks passed our dividend and valuation screen: a current yield of at least 2%, dividend growth over the past five years above the 8% median for the sector and a below-average forward PE. Two of the stocks also show up as Attractive based on YCharts proprietary valuation analysis: Caterpillar (CAT) and Deere (DE).
Both stocks trade at a forward PE below 11, compared to a sector average of 14. Those low valuations are in part a function of their prices going nowhere recently; Caterpillar is down more than 3% this year and Deere is flat, while the S&P 500 is up 11%. Commodity demand is the issue.
For Caterpillar, slowdowns in China and other emerging Asian economies has lowered demand for mined commodities. That translates into lower demand for Caterpillar’s excavators and loaders. For Deere, much of the pressure is local, as lower U.S. agriculture prices makes it harder for farmers to pony up for big capex outlays on new machinery.
Those headwinds could persist in the short-term, but if you’ve got a longer-term perspective, it’s interesting to note that the 10-year cyclically adjusted PE ratios for Caterpillar and Deere are now at levels normally seen during recessions.
In the meantime, both Caterpillar and Deere deliver a decent current dividend yield of around 2.5% and both have payout ratios below 30%.
Carla Fried, a senior contributing editor at ycharts.com, has covered investing for more than 25 years. Her work appears in The New York Times, Bloomberg.com and Money Magazine. She can be reached at firstname.lastname@example.org.
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