Investing in Industrial Stocks (Using MarketXLS)
The industrial goods sector is a category of companies that make or sell machinery, supplies, or equipment used in manufacturing and construction. These companies play a crucial role in the economy by supporting other industries. They supply the machinery, equipment and industrial tools that are used to produce consumer goods and services. Examples of the industrial sectors include industrial machinery, aerospace and defence, tools, construction, waste management, manufactured housing, lumber production, metal fabrication and cement.
Performance in the industrial goods sector is largely driven by supply and demand for building construction in the commercial, residential, industrial real estate segments, and also the demand for manufactured products.
Industrial Sector Broadly Focuses On These 4 Areas:
▪ Construction – Industrial companies provide the basic materials used in construction. Bricks, shingles, concrete and electrical wires are all produced, developed, and distributed by industrial-goods companies.
▪ Machinery & Manufacturing – The companies that manufacture and distribute the machinery that helps to build the communities we live in are an important part of the industrial sector.
▪ Health Care – The medical equipment used to treat patients along with basic surgical tubes and other health care-related materials, are all part of the industrial sector.
▪ Defence, Aerospace and Transportation – Industrial-goods companies are also active in the defence sector. Various materials used in the development of vehicles, new weaponry and other tools used in the defence industry are developed by companies in the industrial sector. This includes operating an airline or railway as well.
Industrial Stocks that Investors May Consider
Industrial stocks cover several different industries. A few popular sub sectors include:
- Aerospace and defence
- Electrical equipment
- Construction and engineering
- Machinery industry
- Transportation infrastructure
3M Company (NYSE:MMM)
3M Company manufactures, develops and markets various products globally. It operates through four business segments: Transportation and Electronics, Safety and Industrial, Consumer and Health Care. This diverse product portfolio empowers the company to generate steady cash flow. It has historically ploughed back around 30% of its available capital (combining its operating cash flow with its debt capacity) into growing its business through capital and research and development projects. This enables it to produce new products and stay one step ahead of the peers. The company also returns about 30% of its earnings to investors via a growing dividend, which it has increased for more than 50 consecutive years. It also uses its capital to make acquisitions. Thus the company invests in growth while also returning money to shareholders because it maintains a strong investment-grade balance sheet. The company has a Market Capitalization of $117B with a dividend yield of 2.94%.
FedEx Corporation (NYSE:FDX)
FedEx Corporation provides e-commerce, transportation and business services internationally. The company’s FedEx Express segment offers small-package ground delivery, express transportation and freight transportation services. It also provides cross-border e-commerce technology, time-critical transportation services and e-commerce transportation solutions. Its FedEx Ground segment provides day-certain delivery services to residences and businesses. The company has a Market Capitalization of $78B with a dividend yield of around 1%.
General Electric Company (NYSE:GE)
This company operates as a high-tech industrial company worldwide. The company’s Power segment offers aeroderivative and heavy-duty gas turbines for utilities and industrial applications, service, maintenance and upgrade solutions to plant assets, steam power technology for nuclear and fossil applications, including generators, boilers, steam turbines, and air quality control systems and much more. The company is trading at the present levels of $13. The company has a Market Capitalization of $118B with a dividend yield of 0.30%.
Raytheon Technologies Corporation (NYSE:RTX)
Raytheon Technologies Corporation is a defence and aerospace company that provides systems and services to military, commercial, and government customers worldwide. It operates several business segments, which focus on cybersecurity, missile defence, electronic warfare, and precision weapons. As a defence and aerospace contractor, Raytheon is fairly recession-resistant. Because of those operations, it generates relatively steady cash flow.
However, since it gets the majority of its revenue from the U.S. government, Raytheon is highly receptive to changes in the U.S. defence budget. A steady cash flow and a sound financial profile provide Raytheon with the opportunity to invest in research and development and also return cash to shareholders via stock repurchases and dividends. The company has a Market Capitalization of $135B with a dividend yield of 2.30%.
Honeywell International Inc. (NYSE:HON)
Honeywell International Inc. operates as a diversified manufacturing and technology company worldwide. The company has 4 major segments: Aerospace, Honeywell building technologies, Performance materials and technologies, and Safety and productivity solutions. The company provides auxiliary power units, flight safety, engine controls, switches, sensor control systems, video surveillance, catalysts and absorbents, bullet-resistant armour, computer chips, gas detection technology, mobile devices and software, personal protection equipment, software solutions, etc. across all the segments. The company has a Market Capitalization of $155B with a dividend yield of 1.65%.
Union Pacific Corporation (NYSE:UNP)
Union Pacific Corporation, along with its subsidiary, Union Pacific Railroad Company, engages in railroad contracts in the United States. The company offers transportation services for grain products, food and refrigerated products, fertilizers and coal and renewables to animal feeders, grain processors, ethanol producers, and other agricultural users. It also transports coal and sand, liquid petroleum gases, petroleum and construction products, plastics, industrial chemicals, forest products, metals and ores, soda ash, as well as finished automotive parts, automobiles and merchandise in intermodal containers. The company has a Market Capitalization of $148B with a dividend yield of 1.92%.
Waste Management, Inc. (NYSE:WM)
Waste Management is one of the leading waste management companies in North America, providing transfer, collection, and disposal services as well as resource recovery and recycling. The company is also a leading operator and developer of landfill gas-to-energy facilities.
Waste Management provides its services to commercial, industrial, residential, and municipal customers. The company has been able to reduce some of the Covid-19 impact through a continuous focus on expanding its margins and reducing its costs. It has invested money to automate its fleet of collection trucks and converted them to run on cleaner natural gas. The company has a Market Capitalization of $59B with a dividend yield of 1.64%.
What ETFs track the industrial sector?
Some popular ETFs that track the industrial sector are:
- Industrial Select Sector SPDR ETF (XLI)
- Fidelity MSCI industrial ETF (FIDU)
- iShares Global industrial ETF (EXI)
- iShares US industrial ETF (IYJ)
- SPDR S&P Aerospace and Defence ETF (XAR)
- Vanguard industrial ETF (VIS)
Pros of Investing in Industrial Sector
Easy to Read – Industrial stocks are inclined to economic cycles. When the economy is doing good, the industrial sector prospers and may even outperform the market. But when economic conditions start to falter, it is suggested to sell industrials and look for other investment options. For example, as the US recovered from the Great Recession in 2009, the S&P 500 industrial Index returned 26.7% as compared to the S&P 500 Index which returned 15.1%.
Room for Growth – The industrial sector witnesses a boost when the economy is just coming out of a recession. Economic growth and a rise in revenues and employment can promote business confidence. This could mean new building projects and machinery purchases. Most of the big players in the industrial sector have a long history in business. If a company has shown consistent growth for the past 60 or 70 years, there is a fair chance it will continue to grow ahead.
Dividend Payments – The industrial sector is home to many dividend-paying stocks, though the average dividend yield is low at 1.76% compared to the average 3.6% in utilities. However, there are many entities across the sector that pay dividend yields of 3% or more, giving one a way to make money through dividend stocks while gaining exposure to the sector.
Cons of Investing in Industrial Sector
Tariffs – During the times of geopolitical unrest and trade wars, taxes and tariffs push the cost of goods up. Higher prices divert consumers and can lead to lesser sales and cuts in production, thus slowing the sector down.
Economic Dependence – Industrial stocks are heavily correlated with the economy, thus posing an additional level of risk to the investors. Investors also need to watch the economies of key countries, like China. For example, about 7% to 9% of US industrials are tied to China’s economy, with some big names like General Motors (GM) and 3M (MMM). A slowdown abroad can shake a large portion of US industrial stocks.
Low demand – During a weak economy, the need for industrial services and goods also declines. Less demand directly impacts industrial stocks’ performance and profits.
Intra Sector Comparison using MarketXLS Template:
MarketXLS provides a ready-to-use template for facilitating intra sector comparison of companies on the basis of Market Cap. for various sectors. Using the Intra Sector View template, the Investor can select the ETF and compare the companies that are part of that index. The investor can also modify the stocks/components of the ETF based on his requirement. The comparison is based on CMP, Market Capitalisation, P/E, Revenue, and Profit Growth, ROE, and ROC indicators. Use the Industrial sector code XLI to get the data of various companies under the industrial index.
You can click here to go to the template.
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Making money in the industrial sector depends heavily on making the right investment decisions. Since the industrial sector is one of the oldest sectors in the world, it gives investors the benefit of looking into the detailed history of companies and their experiences. Looking back at long-term stock charts, you may see dips when economic depressions and recessions took hold across the globe. You should try to invest only in industrial stocks that have generated significant long-run gains overall.
Also, take some time to research a company’s financial history. After all, when looking for any stock, a history of earnings and revenue growth is a great sign for the future.
The industrial sector is not one known for paying great dividends. But that does not mean good dividends never come by. For example, Watsco, ABB, Lockheed Martin, United Technologies have consistently offered strong dividends. So, if you invest in the sector, try to look for strong dividend yields.
When picking stocks in this sector, it is best to look for companies that aren’t heavily correlated to the broader economy. Some kinds of industrial companies are protected from the cyclical nature of the sector: Defence, Aerospace, Medical manufacturing equipment, and Diversified firms like Honeywell.
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