Ingersoll-Rand (IR) is a buy for the total return investor that also wants some dividend income. Ingersoll-Rand is one of the largest industrial and commercial products and services companies in the world. IR is a cyclical investment for the total return investor who also wants some growing income. The recession headlines are a bit overdone, the United States economy is fine with Europe weak, but overall, I believe the total world economy will grow at a steady pace over time. The phase one trade deal with China could be completed before Christmas, which will kick IR’s sales and earnings.
Ingersoll-Rand is 5.54% of The Good Business Portfolio, a full position. The company has steady growth and has the cash it uses to increase dividends and grow their business.
I use a set of guidelines that I codified over the last few years to review the companies in The Good Business Portfolio (my portfolio) and other companies that I am reviewing. For a complete set of guidelines, please see my article ” The Good Business Portfolio: Update to Guidelines, August 2018“. These guidelines provide me with a balanced portfolio of income, defensive, total return, and growing companies that hopefully keeps me ahead of the Dow average.
Ingersoll-Rand is reviewed in the following topics below.
- Investment Fundamentals
- Company Business
- Portfolio Management Highlights
When I scanned the five-year chart, Ingersoll-Rand has a great chart going up and to the right in a steady, strong slope for the last four years with hardly a bump down except for early in the year of 2016 when the company had a downturn and has recovered from this bump down through the next three and a half years.
The Good Business Portfolio Guidelines are just a screen to start with and not absolute rules. When I look at a company, the total return is a key parameter to see if it fits the objective of the Good Business Portfolio. My total return guideline is that total return must be greater than the Dow’s total return over my test period. Ingersoll-Rand beats against the Dow baseline in my 58-month test compared to the Dow average. I chose the 58 month test period (starting January 1, 2015, and ending to date) because it includes the great year of 2017, and other years that had a fair and bad performance. The great IR total return of 113.85% compared to the Dow base of 56.06% makes Ingersoll-Rand a great investment for the total return investor that also wants a steadily increasing income. Looking back five years, $10,000 invested five years ago would now be worth over $22,600 today. This gain makes Ingersoll-Rand a great investment for the total return investor looking back, which has future growth as the United States economy continues to grow.
Dow’s 58 Month total return baseline is 56.06%
Ingersoll-Rand does meet my dividend guideline of having dividends increase for 8 of the last ten years and having a minimum of 1% yield. IR has a below-average dividend yield of 1.65% and has had increases for nine years of the last ten years, making IR a good choice for the dividend growth investor. The dividend was last increased in June 2018 to $0.53/Qtr. up from $0.45/Qtr. or an 18% increase with increases expected to continue for many years. The five-year average payout ratio is low, at 33%. After paying the dividend, this leaves cash remaining for increasing the business of the company.
I also require the CAGR going forward to be able to cover my yearly expenses and my RMD with a CAGR of 7%. My dividends provide 3.3% of the portfolio as income, and I need 1.9% more for a yearly distribution of 5.2% plus an inflation cushion of 1.8%. The three-year forward S&P CFRA CAGR of 10% easily exceeds my guideline requirement. This good future growth for Ingersoll-Rand can continue its uptrend benefiting from the continued strong growth of the worldwide and United States economies.
I have a capitalization guideline where the capitalization must be greater than $10 Billion. IR easily passes this guideline. IR is a large-cap company with a capitalization of $31.3 Billion. Ingersoll-Rand 2019 projected cash flow at $1.5 Billion is good, allowing the company to have the means for company growth and increasing dividends each year. Large-cap companies like IR have the cash and ability to buy other smaller companies and weather any storms that might come along.
One of my guidelines is that the S&P rating must be three stars or better. IR’s S&P CFRA rating is four stars or buy with a target price to $145, passing the guideline. IR’s price is presently 12% below the target. IR is under the target price at present and has an average forward PE of 18, making IR a good buy at this entry point. If you are a long-term investor that wants a good steady increasing dividend income and total return growth, you may want to look at this company.
One of my guidelines is would I buy the whole company if I could. The answer is yes. The total return is strong, and the average growing dividend makes IR a good business to own for income and growth. The Good Business Portfolio likes to embrace all kinds of investment styles but concentrates on buying businesses that can be understood, makes a fair profit, invests profits back into the business, and also generates a good income stream. Most of all, what makes IR interesting is the potential long-term growth of their business as the working population and economy increases are needing more of its industrial products. IR gives you an increasing dividend for the dividend investor and a great total return. When phase one of the China trade deal is completed, this will strongly help IR.
I don’t have a guideline for earnings, but look for the earnings of my positions too consistently beat their quarterly estimates. For the last quarter on October 29, 2019, Ingersoll-Rand reported earnings that beat expected by $0.07 at $1.99, compared to last year at $1.75. Total revenue was higher at $4.43 Billion more than a year ago by 7.7% year over year and beat expected total revenue by $40 Million. This was a good report with bottom-line beating expected and the top line increasing with a good increase compared to last year. The next earnings report will be out late January 2020 and is expected to be $1.42 compared to last year at $1.00 a good increase.
The graphic below shows a summary of the 3rd quarter’s 2019 financial performance. The earnings growth of IR is well above average and will continue with good steady innovation in their product line and the increasing need worldwide for their products and services.
Source: IR 3rd quarter 2019 Earnings call slides
Ingersoll-Rand is one of the largest industrial products companies in the United States and foreign countries.
As per excerpts from Reuters
Ingersoll-Rand provides products, services, and solutions to improve the quality and comfort of air in homes and buildings, transport and protect food and perishables.
The Company’s business segments include Climate and Industrial. The Company is engaged in the design, manufacture, sale, and service of a portfolio of industrial and commercial products that include brand names, such as Ingersoll-Rand, Trane, Thermo King, American Standard, ARO, and Club Car.
The Company’s Climate segment includes Trane and American Standard Heating and Air Conditioning, which provide heating, ventilation, and air conditioning (HVAC) systems, and commercial and residential building services
The Industrial segment includes compressed air and gas systems and services, power tools, material handling systems, ARO fluid management equipment, as well as Club Car golf, utility and consumer low-speed vehicles
Overall, Ingersoll-Rand is a good business with 10% CAGR projected growth as the United States and foreign economies grow going forward, with the increasing demand for IR’s products. The fair dividend income brings you cash as I continue to see further growth as the world economy grows. The talking heads that preach recession should be ignored, and even with a slowdown in the world economy, IR’s great products should win the race.
The quotes below from the 3rd quarters earns call are only some of many statements indicating growth for the company’s products that IR is making to increase their business.
I want to start today’s call with a brief overview of our global business strategy that’s enabling us to consistently deliver strong financial results for our shareholders. Fundamentally, our strategy as the nexus of environmental sustainability and impact, which are strong secular tailwinds for our business. The world is continuing to urbanize while becoming warmer and more resource-constrained as time passes.
At our core, we are focused on and excel at reducing the energy intensity in buildings, reducing greenhouse gas emissions, reducing waste of food, and other perishable goods, and we excel in our ability to generate productivity for our customers, all enabled by technology. Unless you think the world is getting cooler, less populated, and less resource-constrained as time passes, these strong secular tailwinds will continue to provide an opportunity for shareholders and purpose for our vision.
As we continue separation, integration planning activities related to the combination of our Industrial segment with Gardner, Denver and transformation activities related to our move towards creating the premier pure-play climate business in 2020, our aggressive pursuit of excellence in driving solutions to mitigate the impact of these secular trends only intensifies.
Our Climate businesses squarely focused 100% of our portfolio at the nexus of sustainability and global environmental impact, where our products and services can reduce the impact of these megatrends and further advance the platform for the company to grow above-average global economic conditions.
We remain bullish on our strategy, the opportunities that lie ahead in our end markets broadly and particularly, and our team’s resilience and their ability to execute, using our business operating system to deliver against the top tier organic revenue growth and adjusted EPS guidance targets we provided for fiscal 2019.
Asia continues to see the impacts of trade tensions, and broader economic uncertainty remains a stable market. Commercial HVAC Asia, organic bookings were up mid-single digits in the third quarter. Climate Asia organic revenues were down mid-single digits against the tough low teen’s revenue comp in China in the third quarter of 2018.
This shows the feelings of top management for the continued growth of the Ingersoll-Rand business and shareholder return with an increase in future growth. IR has good constant growth and will continue as the world economy and population grows. The growth is being driven by added features of their existing services and products, which are increasing sales and earnings.
The graphic below shows the 3rd quarter financial performance and balanced capital allocation that will continue to bring growth to the stockholders of IR.
Source: IR 3rd quarter 2019 Earnings call slides
Ingersoll-Rand is a good investment choice for the total return and dividend growth investor with its below-average dividend yield and high total return. Ingersoll-Rand is 5.54% of The Good Business Portfolio and will be held and watch it grow. IR will be held in the portfolio and will be trimmed when it reaches 8% of the portfolio. I buy what I consider great businesses that are fairly priced, and the present IR entry point looks good. Good growing businesses do not come cheap, but over time, they grow and grow. If you want a solid growing dividend income and good total return in the industrial business, IR may be the right investment for you.
Portfolio Management Highlights
The five companies comprising the largest percentage of the portfolio are: Johnson & Johnson (JNJ) at 7.6% of the portfolio, the Eaton Vance Enhanced Equity Income Fund II (EOS) at 7.8% of the portfolio, Home Depot (HD) at 10.2% of the portfolio, Omega Health Investors (OHI) at 8.9% of the portfolio, and Boeing at 13.0% of the portfolio. Therefore, BA, EOS, JNJ, OHI, and HD are now in trim or close to trim position, but I am letting them run a bit since they are great companies.
- On November 18, I wrote covered calls against my Danaher (DHR) position to collect another premium ($4.25/share December $140). I like DHR, but it’s getting a bit pricey, and the covered calls give me some extra income and downside protection.
- On August 30, I trimmed HD to 10% of the portfolio. HD is a great business but needs more foreign expansion to grow even stronger.
- On August 30, I trimmed OHI to 9% of the portfolio. OHI is a great income business, but it has risks, so 9% is my limit on this company until the operator problems are totally under control.
Boeing is going to be pressed to 15% of the portfolio because of it being cash positive on 787 deferred plane costs at $938 million in the first quarter of 2019, an increase from the fourth quarter. Boeing has dropped in the last six months because of the second 737 Max crash, and I look at this as an opportunity to buy BA at a reasonable price. From the latest news from Boeing, Boeing now expects the 737 Max to fly by the beginning of January 2020. The software data and training materials have been submitted to the FAA.
JNJ will be pressed to 9% of the portfolio because of its defensive nature in this post-BREXIT world. Earnings in the last quarter beat on the top and bottom line, and Mr. Market did nothing. JNJ in April 2019 increased the dividend to $0.95/Qtr., which is 57 years in a row of increases. JNJ is not a trading stock but a hold forever; it is now a strong buy as the healthcare sector remains under pressure.
The total return for the Good Business Portfolio is ahead of the Dow average YTD by 4.03%, which is a nice gain above the market for the portfolio with BA a strong drag.
Disclosure: I am/we are long BA, JNJ, HD, DLR, EOS, SLP, DHR, LMT, IR. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Of course, this is not a recommendation to buy or sell, and you should always do your own research and talk to your financial advisor before any purchase or sale. This is how I manage my IRA retirement account, and the opinions of the companies are my own.