European-based ABB Ltd (NYSE: ABB) isn't exactly a household name in the United States, but its operations span the globe providing business customers with the electrical and automation products they need to succeed. The yield is a whopping 4.1% today, toward the high end of its peer group, and roughly twice what you'd get from an S&P 500 Index fund. For income investors, this is a high-yield stock worth taking a close look at today following a really good third quarter.
A little background
ABB's business is broken into four broad segments. Power Grids provides things like long-haul power equipment to utilities. Electrification's products help ensure steady power supply to operations such as data centers. Industrial Automation helps miners and others make the most efficient use of their assets. And Robotics and Motion provides things like robotic arms that help increase productivity throughout the industrial sector. These are just some broad examples, of course, as the $40 billion market cap industrial giant's portfolio covers a lot of ground.
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Despite the diversification and breadth of ABB's portfolio, the third quarter was a really good one all around. Every major business group turned in a strong performance, relatively speaking. To put some numbers on that, Power Grids' comparable sales were flat in a difficult market environment. Electrification and Industrial Automation each saw 3% comparable sales growth. And Robotics and Motion led the pack by pitching in 7% growth.
All in, comparable sales grew 3% at ABB in the third quarter. That helped push the company's comparable earnings up 4%. For the first nine months of the year, meanwhile, comparable earnings were up 12%. Things are clearly going pretty very well for ABB right now.
A look to the future
That said, ABB's business tends to serve more cyclical industries than some of its peers. That's part of the reason for the relatively high yield today. But there's nothing in the pipeline that suggests ABB is facing material trouble. In fact, the company saw order growth "in all divisions and regions" in the third quarter. Base orders were up 7% overall year over year, helping to push the company's backlog up 2%. With $23.5 billion of work waiting to be done (roughly 45% will get completed in 2019, according to the company), ABB appears to be on very solid footing as it heads into the final stanza of 2018, and as it looks toward full-year 2019.
In fact, in the earnings release, management noted, "Macroeconomic signs remain robust in Europe and are trending positively in the United States, with growth expected to continue in China." Although ABB pointed out that there's increasing geopolitical uncertainty in various markets, it added, "the overall global market is growing." That's a good sign for its business even though investors have been worried about the broader industrial group recently.
This brings up a second reason for concern at ABB: The company recently bought GE's Industrial Solutions business for $2.6 billion. GE Industrial Solutions, which was added at the end of June, came to ABB with relatively low operating margins, pushing the company's overall operational EBITDA margin down to 12.1% in the just-ended quarter from 12.9% a year earlier. That may not seem like a huge change, but it's a big deal for a company that generates $9.3 billion in quarterly revenue...and the number is heading in the wrong direction. ABB's goal is to integrate GE Industrial Solutions and, along the way, improve the business' performance to bring it more in line with ABB's other divisions. There's no overnight fix, here, but in time, ABB should be able to cut costs and get this new operation performing at a higher level.
ABB has a strong history of buying and selling assets to build its business. There's no reason to believe the GE Industrial Solutions purchase will suddenly derail the company to such a degree that it can't recover. And if this one acquisition doesn't work out as planned, ABB will get rid of it and find other assets with which to replace it. That's what industrial conglomerates like ABB do.
The negative view about the acquisition and ABB's cyclical bent, meanwhile, have left ABB with a relatively high yield compared to peers. For investors willing to think long term and give the company some time to work through the GE Industrial Solutions integration process, the elevated yield is worth a close look. Note, too, that the company has increased its dividend every year since 2008. (The dividend is paid in Swiss francs, so the U.S. value of the payments will fluctuate with exchange rates.) And with long-term debt making up just about a third of the capital structure, ABB's balance sheet is strong. It should be able to weather any downturn in stride despite the toll such an economic environment would take on revenues and earnings.
ABB deserves more credit
At the end of the day, this industrial giant turned in a great third quarter. The negatives that have been pushing its yield higher appear somewhat overblown. It will fix or jettison GE Industrial Solutions, for example. And the economic environment doesn't look like it's slowing down yet based on the company's order book. Even if it did, though, ABB is financially strong and could withstand the blow. If you are looking for a high-yield stock with a global business, ABB should be on your short list today.
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