As we wrote in our previous article, the uncertainty in the global macroeconomy continues at an elevated level and is heightened by the election in Greece this weekend.
The election is really a referendum on whether that country should commit to stay on as a member of the euro zone or reject austerity in a bid to call Brussels' bluff. Not surprisingly, the U.S. stock market has been somewhat manic this week, lurching from despair to hope and back again.
Through it all, many high-quality, globally competitive companies with attractive dividend yields and growth rates, conservative capital structures and steady operating performance are very cheaply valued. We have referred to these as all-weather stocks. These businesses' strength should offer protection in choppy markets, investors get paid while they wait for better markets, and investors can also expect higher stock prices as markets improve.
Here are two more all-weather suggestions:
Emerson Electric (EMR), the large electrical equipment conglomerate is a well-managed company with consistently high profit margins and steady revenue and earnings growth. Its key businesses are process controls, industrial automation and climate conditioning, which account for 75% of the profits.
Emerson is expected to earn about $3.40 a share in the current 2012 fiscal year. Fiscal 2013 earnings look to be in the $3.90 range, suggesting the stock is valued at 13.7x 2012's earnings and just 11.9x 2013's earnings -- cheap compared with expected long-term earnings growth of 11.3% annually. Historically, the company's strong and consistent operating performance has garnered a large premium valuation compared with the S&P 500, but today the stock is valued in-line. The dividend yield today is 3.4%, a large margin above the index. Emerson pays out less than 50% of earnings, and it will likely increase the dividend as earnings expand.
Emerson will benefit from secular demand growth as well as attractive exposure to emerging markets. Looking past the near-term European uncertainty, the stock should benefit disproportionately from global economic expansion, but the company has already suffered through some cyclical weakness, which has resulted in its current discounted valuation.
Over time, we believe EMR is more appropriately valued at about $60, and the stock should be fairly steady before it eventually reaches that target.
Johnson Controls (JCI) is trading at tempting values: just 10.3x and 8.4x earnings for the years ending September 2012 and 2013 respectively, and it carries a 2.6% dividend yield. This company is the class act of the OEM auto supplier industry. It manufactures seating and interiors for the auto companies worldwide, as well as original and replacement car batteries (including for electric vehicles). Johnson Controls also provides energy-efficient HVAC systems and controls for commercial buildings.
Europe is clearly a drag on auto production, but this is offset by the good performance in the U.S. and by Johnson's expanding footprint in China and elsewhere in Asia. The battery business has a surprising amount of technical innovation coming, which can improve prices and margins on what is already a very good business.
Building efficiency is a stable business with an attractive outlook, the trend to improve energy efficiency over time is undeniable, and the company can demonstrate real savings to owners.
Long-term earnings growth expectations for the company in the mid-teens provide room to increase the dividend significantly, as the payout ratio of current earnings is just 26%. It's not hard to see a path for the stock getting back to $40 when the European economy stabilizes.
Thanks to a strong business, attractive dividend and valuation, we also don't see much downside to JCI from here, even with continued market choppiness.