For long-term investors, there's nothing better than "Forever
Stocks" -- shares of firms that are head-and-shoulders above the
competition and that are so structurally sound that you can
basically own them forever.
What long-term investors like just as much is when the crowd
is scared out of a Forever Stock, creating a rare opportunity to
buy these high-quality shares at a reduced price.
Indeed, one the best Forever Stocks is available at an
incredible bargain, with shares off sharply in the wake of a
surprise second-quarter earnings disappointment. For the quarter,
the firm reported earnings per share (
) of $1.11, missing analyst estimates by $0.02. For this, the
market saw fit to beat the stock down 12%.
A 12% drop for a 2% miss may seem pretty irrational, but it
doesn't faze long-term investors. Any reason will do to get a
Eaton Corp. (NYSE:
. This firm is a global leader in power management solutions --
things like electrical, mechanical, hydraulic and drivetrain
systems -- for the automotive, aerospace and agricultural
A few variables hindered Eaton in the second quarter. The firm
paid $39 million to restructure its industrial segment, $644
million to settle longstanding legal disputes and had a $156
million taxable gain on a couple of small divestitures.
"Factoring in these unusual items, operating earnings per
share in the second quarter were reduced by $0.70 after tax,"
said Alexander Cutler, Eaton's CEO and board chairman.
Slightly slower organic revenue growth was also an issue in
Q2, and it prompted management to reduce its guidance for overall
growth in 2014 to 3% from 4%.
Sure, these sorts of things can be cause for concern, but they
are common, short-term obstacles. The key is to focus on the big
picture and remember why Eaton is a Forever Stock.
One such reason is its attractive and growing dividend. At
$1.96 a share, dividend payments have nearly doubled since 2009,
when the firm paid out $1.00 a share. What's more, it represents
a payout ratio of only 49%, which not only indicates
sustainability but room for future increases. If Eaton is able to
continually boost its bottom line, then the dividend could
continue to rise.
Mind you, it's probably unrealistic to expect a repeat of the
torrid expansion seen from 2009 to today. During that period,
earnings per share (
) nearly quadrupled from $1.14 to $4.03. That kind of growth
might be a thing of the past, but Eaton can comfortably meet
consensus projections of 11% annual EPS growth for the next five
You see, the firm is remaking itself. It's evolved over the
past decade from mainly a drivetrain and engine parts company to
a more diversified provider of power management solutions. Eaton
is even attempting to enter the rapidly growing cloud computing
Cloud will not necessarily be a major revenue source for
Eaton. Maybe it will, maybe it won't. Nonetheless, the firm's
goal is to attract customers by helping them cut energy costs
through more efficient usage of power sources. The takeaway: a
growing focus on power management -- as opposed to just providing
products -- can open more doors for Eaton.
For instance, the company's lighting controls are designed to
adjust the lights in a room automatically. Lights are turned off
when a space is empty and they dim when natural light is strong.
Technology like this can reduce energy consumption for lighting
by up to 30% and improves fuel efficiency by as much as 25% in
With global demand to reduce energy consumption, superchargers
and other products that enhance fuel efficiency should see very
strong demand both domestically and abroad. Eaton is particularly
keen on expanding exposure in the fast-growing Asian car markets.
This market -- where less than 10% of the population own a car --
could be highly lucrative for Eaton.
Risks to Consider:
Although Eaton has been expanding beyond automotive and
aerospace, it still has substantial exposure to these highly
Action to Take -->
Eaton's recent plunge is a prime chance to buy this Forever Stock
at attractive valuations. Based on projected EPS of $5.34 in 2015
and a recent stock price of $69.20, shares have a forward
price-to-earnings (P/E) ratio of only 13. With EPS expected to
grow 11% annually for the next five years, upside is on the order
of 87% to $129 a share by the fall of 2019, assuming an earnings
multiple in the historic range of 19. Since management aims to
raise Eaton's dividend by 15% a year, the stock could be yielding
about 3.1% at that point.
Eaton is the perfect example of a Forever Stock... but
it's not the only one
. After six months and $1.3 million worth of research, my
colleague Dave Forest found dozens of Forever Stocks that pay a
fat dividend, dig a deep moat around their business to fend off
competitors and buy back massive amounts of stock. To learn more
that he unearthed -- including some names and ticker symbols --
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