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. (FIX). This one hundred 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%, 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. 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. (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, 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 of 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, 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 (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%, 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 several years back of Allegion Plc (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, IR is trading well below its five year average PE of 21.8.
Next, is another long time holding of mine, Johnson Controls International plc (JCI). Founded in 1885, JCI recently completed a merger with Tyco International plc (TYC) combining the two industrial companies while jettisoning one of its core segments (automotive interiors) as a spin off (Adient (ADNT)) set to occur on October 31. With a current yield of 1.95% and a moderate payout ratio 65.1% JCI can continue its dividend distribution based on current cash flows and with a five year annualized dividend growth rate of 14.46% should continue to pay ever increasing passive income to shareholders for years to come. For those looking to invest in alternative fuels, particularly the lithium and lead acid battery markets, JCI may be a diversified fit for your portfolio. JCI currently trades at a PE of 34.9.
Finally, a name that really needs no introduction as it’s already quite popular among many of our fellow dividend bloggers, United Technologies Corporation (UTX). Founded in 1934, this diversified industrial company operates many segments including UTC Climate which offers HVAC solutions for residential, commercial, industrial, and transportation applications. With a decent current yield of 2.65% and a moderate payout ratio of 40.1%, UTX has the cushion required to keep paying out a dividend as well as continue to raise it. As with all the other names mentioned, UTX also sports an impressive ten year dividend growth of 11.27%. With a current PE of 22.1, UTX is trading above its five year average PE of 16.3. Forward PE looks more enticing at 14.5. Of course, a four star rating from Morningstar doesn’t hurt either.
There you have it. A brief overview of the current major players in the HVAC market. Clearly, these companies have a lot in common. They are all very old and well established businesses operating in a non-glamorous sector that we all rely upon. They each offer low to moderate current yields but all have impressive annualized dividend growth rates for many years that all appear to be sustainable based in current cash flow. While their businesses are very cyclical in nature they are consistent, and offer potential buyers good opportunities to jump in and buy when the business cycles enter an economic trough.
What do you think about the HVAC market and some of the major companies that operate in the space? Are any of the above names in your portfolio? Please let me know below.
Disclosure: Long IR, ALLE, JCI