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
23 thoughts on “Keeping Cool With HVAC Dividend Stocks”
Very cool and interesting dividend stock article! I like the stats of Ingersoll, so you have owned it for almost 10 years?! That’s pretty damn cool and looks like you’ve had some tremendous fortunate of great dividend increases. Anything you don’t like about them?
Thanks for sharing, as always!
Dividend Diplomats recently posted…Seeking YOUR Advice About Buying a House
Thank you for the kind words regarding the article. IR has been one of my original holdings since I became a dividend growth investor back in 2007. It looks like a lot of people like the name and are interested in owning it but never pulled the trigger on it. It’s been one of my best performers and a few years ago it spun off ALLE which continues to produce for me as well. To answer your question… today there’s really nothing I don’t like about IR except its current share price. While I don’t plan to add more to my holdings at this time, I plan to keep it in my portfolio for the foreseeable future. In fact, Warren Buffett owned IR for a time up until a few years ago. It says something if a company is worthy of being in his portfolio. Thank you for stopping by and commenting.
Living in Houston I know about the need for a quality AC for about 10 months out of the year.
I haven’t heard of the first 2, but I’ve looked at both IR and JCI at various times but never pulled the trigger. Both of those are ones I need to look at once again. I also own UTX although I think you missed another well known dividend grower that operates in this space, Emerson Electric. Off the top of my head, I don’t know how much exposure to HV/AC they have but it’s definitely another candidate in this area.
Thanks for bringing up some lesser known and talked about companies.
JC recently posted…Dividend Growth Investing at Work – Early Announcements Are Fun
I hear you about the need for AC. Arizona is no stranger to hot weather either 🙂
There are a lot of great, what I would call, light industrial dividend plays out there. As you saw form this overview, each company has a long history of being in operation as well as producing some pretty incredible dividend growth rates for many years. To be frank, I have held IR since 2007 and am surprised I do not see that name in more, or any for that matter, dividend portfolios among our online peers. It seems like there is interest in the stock but like you, few have pulled the trigger. Thanks for mentioning EMR. They do have some exposure to the HVAC biz as well. As always, I appreciate your comment.
It’s is amazing but boring businesses, no matter the sector, are usually profitable and belong in any investors portfolio. Just because a company/stock, doesn’t have a ‘story’, doesn’t mean investors should ignore it.
Interesting to learn about the HVAC industry. Never really done any research into this before so this article provided a good intro. Keep up the good work!
Money Grower UK recently posted…My Journey to £1000 in Annual Dividend Income
We all know that “spice” gets the headline and “bland” is never discussed. Of course, it’s usually these bland companies that make the best core positions in any long term stock portfolio. There’s really nothing too exciting about the HVAC biz but judging from the solid dividend growth rates of the companies mentioned, it can look a lot more exciting to a dividend growth investor. Thank you for commenting.
Keeping it cool!
Nice breakdown on some HVAC stocks.
Like the saying goes, no matter what the future holds, you will always need a plumber!
UTX for the win!
Divi Cents recently posted…THE BEST U.S. DIVIDEND STOCKS FOR OCTOBER
Glad you enjoyed this overview of the sector. That’s a good saying you mention too. My dad always said I should have been a plumber. Not glamorous but very much needed and profitable. Thank you for sharing your thoughts.
Excellent picks in there, and two that I have eyed in the past – UTX and IR. What is great about this industry is that they are always in demand. Sure the compete with each other, but its not cool or sexy to get into this field. Boring is great, especially when it pays the bills.
Dividend Gremlin recently posted…Loyal3 Buys, Oct. 2016
By all accounts, each of these companies seem to offer some potential solid dividend growth going forward and capital appreciation as well. We already know the beauty of boring, especially when it comes to dividend reliability. As always, I appreciate your comment.
Never really but much thought into the HVAC industry for investing but it seems as if you have done your home work. Many of them seems to offer stability as from your article they are over 100 years old. I have seen the Lennox brand all over the world so it would seem like the best bet to me out of all, it may be boring but its safe and safe gets the bills paid.
When I come across a company that has been around for over 100 years it signifies to me that it has a product or service that we all need and use on a day to day basis. There’s something to be said for longevity. Of course, the HVAC space is not too thrilling but sometimes it’s these boring sector companies that have the most reliability and predictability when it comes to paying dividends. Thank you for stopping by and commenting.
Thanks for sharing. I enjoyed your analysis. I will be taking at the HVAC industry a little closer. I made some boring buys of my own this week. DIS and EMR. I will be posting about it easier.
Glad you enjoyed this HVAC overview. I like your boring buys too by the way. Nothing wrong with boring as long as those dividends keep rolling in. Boring allows you to sleep well at night. Thank you for commenting.
Thanks for the information keith, that is COOL! I have UTX in my portfolio, at one time I was looking at IR and JCI. I might consider buying some later on.
Jay @ the expat investor recently posted…September 2016 net worth
So you thought my post was COOL 🙂 Ha, ha. Glad you enjoyed! As I mentioned in other comments it appears that IR is catching the eye of many of our fellow dividend investors as of late. I have owned that name since 2007 and was a bit surprised not to see it in other portfolios online. Of course, UTX is a solid industrial company and clearly there are a handful of other solid companies in the light industrial sector that are worth considering too. As always, I appreciate your comment.
I would say that this post is very…… “cool”. Amiright?
I never considered the HVAC sector (or really ever had it even come to mind). I love these articles you post about different industries. So many dividend gems that never would have caught my eye.
From what you posted, FIX and IR catch my eye. Both undervalued with huge growth potential. Me gusta.
ARB–Angry Retail Banker
ARB recently posted…Wells Fargo Fires 5,300 For Opening Fake Accounts
This was the coolest post I ever wrote by far 🙂 OK, enough with the humor. On to the matter at hand. Boring HVAC dividend paying stocks that have a track record going back about one century. As you mentioned, there are many “dividend gems” out there that really fly under the radar. It’s amazing that something as mundane as HVAC products and services can produce such long term solid capital appreciation and dividend growth too. Based on the comments related to this post you are not alone in liking IR. It has been one of my longest holdings in my portfolio and one of my best performers along with spin off ALLE. Why I do not see IR among other portfolios online amazes me. I’m happy you enjoyed this industry specific post. Thank you for stopping by and commenting.
I’ve spent money in 2 Goodman, and 2 ameristar HVAC system, it’s still leave a bad taste in my mouth how much these product cost. I guess, I should have been smart and buy up these guys to collect some sweet dividend to counteract the bitter taste. I guess the winter month is not as good for manufacturing, I’d be on the look out Wednesday sell off or market openning. 😛
Vivianne recently posted…Recent Sell – McKesson (MCK)
HVAC systems are never cheap to buy and rarely cheap to fix when they inevitably fail. I guess that’s the dream of every dividend investor. Buy stocks in the companies of products or services that you use to nullify any future costs they might create. Thank you for commenting.
Great advice. Investing in the HVAC industry might sound boring but it will look good in your portfolio especially with their dividend growth projections.
Sometimes boring can be wonderful. I prefer boring, reliable dividend paying stocks over high flying, uncertain ones. It helps me sleep better at night.