We were greeted Monday morning with news that Eaton (ETN) was acquiring Cooper Industries (CBE). Our interest was piqued by this development, as both companies are represented in our list of Select Blue Chips here at Investment Quality Trends (IQT).
In retrospect, this acquisition makes a lot of sense: Eaton has been working to transform its business toward higher-growth markets with less cyclicality, and it's been doing so by broadening its products mix and geographic exposure through strategic acquisitions. By all accounts, the strategy is succeeding. In 2000, only 20% of Eaton's revenue was generated in developed international and emerging markets, and by the end of 2011 that figure had expanded to 50%.
We are long Eaton in separately managed accounts -- it's in our IQT Select Blue Chip FOLIO, as well as a component of the 2012 Lucky 13 -- so we have an interest in the company. We should also note that there's been a recent change in the dividend yield profile of Eaton. The historically repetitive area of undervalue, or high-yield, would now be realized at a dividend of 3.5%, up from the previous 3%. The new overvalue, or low-yield, area has also changed -- from 1.2% to 1.7%.
In addition to the Eaton chart, we have also provided one for Cooper. Investors have obviously liked this stock, because they have blown the price way past the historically repetitive area of low-yield/high-price on several occasions in the last few years. As Cooper was in our overvalued category, it appears Eaton may have paid up just a tad. Be that as it may, we believe the acquisition will work to Eaton's benefit over the long term, and we believe the company offers excellent value.