Investing in boring industries rarely gives your portfolio a “shot in the arm” in terms of dramatic capital appreciation but what it can do is provide stability and predictability in terms of tempered growth and a potential reliable source of dividends for decades on end.
One such “boring” industry that rarely gets discussed is the heating, ventilation and air conditioning (HVAC) industry. When you think about it, these HVAC systems surround us every single day, whether we live in a house or apartment, work in a high rise building or warehouse. It is these systems that keep us comfortable from the outside elements.
The HVAC industry, as with most industrial sector plays, is very cyclical in nature, often moving in lock step with general construction trends. As housing and other building projects boom so do the following companies. During cyclical housing and construction busts, HVAC businesses follow suit as well. With that being said, let’s take an overview of this sector and see if any could be a fit for your long term dividend growth portfolio.
First up, Comfort Systems USA, Inc. (NYSE:FIX). This 100-year-old company has been providing HVAC services and support for office buildings, retail centers, apartment complexes, manufacturing plants, government facilities and more. Currently yielding 1.03% with a very low payout ratio of 16.2%, Comfort Systems USA, Inc. (NYSE:FIX) has plenty of room to continue to pay and raise its dividend. In fact, it has an impressive ten-year annualized dividend growth rate of 25.89%. While its current yield may not excite, its dividend growth rate definitely will. Comfort Systems USA, Inc. (NYSE:FIX) currently sports a 17.7 PE, which is well below its five-year average PE of 33.0. Forward PE comes in at a lower 14.3.
Next is a familiar name to many, as its namesake air conditioning units are installed in many homes across the country; Lennox International Inc. (NYSE:LII). Another old-time company, founded in 1895, LII designs, manufactures, and markets a range of HVAC and refrigeration products for residential and commercial customers. Like FIX, Lennox International Inc. (NYSE:LII) offers a relatively small current yield, coming in at just 1.15%. This yield is very well covered by current cash flow, as its payout ratio is on the small side at just 25.0%. By all accounts, the dividend currently appears to be very safe. If the current yield doesn’t excite, perhaps the 12.90% ten-year annualized dividend growth rate will. With a current PE of 26.6, Lennox International Inc. (NYSE:LII) is priced on the higher-end of the valuation spectrum when compared to its five-year average PE of 23.5. Forward PE looks more enticing at 19.2.
Continuing down the HVAC vent we come across one of my long time holdings, Ingersoll-Rand PLC (NYSE:IR). Founded in 1872, IR just announced a monster dividend raise of 25.0%. How’s that for an annual dividend growth rate? Yielding a more acceptable 2.43%, Ingersoll-Rand PLC (NYSE:IR) sports a moderately low payout ratio of 31.3%. This stock has been with me since I became a dividend growth investor back in 2007 and has been one of my top performers, along with its spin-off of several years back, Allegion PLC (NYSE:ALLE).
Like the other companies mentioned, IR offers various HVAC equipment and support for mostly non-residential clients and offers its products under the American Standard, ARO, Club Car, Nexia, Thermo King, and Trane brand names. With a decent current yield, IR also sports an impressive ten-year annualized dividend growth rate of 9.80%. I expect that number to rise should IR continue making serious double-digit annual dividend increases. With a current PE of 12.2, Ingersoll-Rand PLC (NYSE:IR) is trading well below its five-year average PE of 21.8.
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