Tom Konrad, CFA
Hubbell Inc. (HUB-B) is a strong grid stock that also has strong financials, signaled by a recent dividend increase.
I came across Hubbell Inc. (HUB-B) when researching General Cable (BGC) for my recent article on the company. Just one more example of when you start researching a sector, (in this case electrical transmission and distribution, or “strong grid”) you never know what new companies you may find.
Hubbell is a diversified electrical supplier, serving electric utility, residential, commercial, and industrial markets worldwide. About a quarter (26%) of its revenue comes from the “Power Systems” segment, which is roughly what I am focusing on in this series on the “Strong Grid.” I previously rejected EMCORE Group (EME) because it only has about 20% of its revenues from the strong grid, so the reader might reasonably ask, “What’s so much better about Hubbell?”
The main advantage is that Hubbell’s other divisions have exposure to the Smart Grid, and Energy Efficient lighting, which means that my best guess of the company’s overall exposure to my favorite clean energy sectors is somewhere around 50%. Emcore also had some exposure to these sectors (it is a diversified mechanical and electrical construction group), but probably not so much.
The Dividend Increase
And then there’s the dividend increase. As a value-oriented investor, I love dividends. I’m especially fond of companies that keep increasing their dividends. Dividends signal that management is confident about the solidity of their revenues going forward, and they are also a valuable source of return in the low-growth (or even no-growth) environment I’m expecting to prevail in coming years. The new quarterly dividend payment of $0.36 per share (vs. $0.35 previously) equates to a 3% dividend yield at $48 per share. Three percent is not much by historical standards, but it’s pretty good in current markets.
The company’s growth strategy is also one of acquisitions. With companies still finding it difficult to raise funds, companies like Hubbell that can fund acquisitions directly from their balance sheet are in a good position to scoop up bargains, and the company’s long experience with such acquisitions gives us some assurance that they will be able to integrate the acquired companies successfully.
Both Hubbell class A (HUB-A) and class B (HUB-B) shares are traded on the NYSE, with B shares having much higher volume, and class A shares trading at a slight discount to B shares. Class A shares have 20 times the voting rights of class B shares, but only have about 1/100 of the trading volume. A long term, small investor would probably be better off holding A shares to take advantage of the discount (and the voting rights) but larger investors and traders will gravitate towards the B shares.
On the other hand, despite the solid balance sheet and cash flow, the company is trading at too high a Price/Earnings ratio (15) for me to consider buying in what I expect to be a down market in 2010. But if the market decline I expect materializes, that high-ish P/E will give Hubbell some room to fall. If a market decline brings Hubbell into the mid-to-low 30’s, I’ll have my finger on the “buy” button.
Selected data as of 2-21-2010:
|Stock Price (HUB-B/HUB-A)||$47.48/$46.67|
|P/E (trailing 12 month, HUB-B/HUB-A)||15.17/14.91|
|Cash per share||$4.41|
|Months to pay off net debt from cash flow||7 months|
|Dividend yield (HUB-B/HUB-A)||3.03%/3.08%|
|Revenues from “Strong Grid”||26%|
|Revenues from Clean Energy and supporting sectors||roughly 50%|
|3 month average volume (HUB-B/HUB-A)||214,000 / 2,100|
DISCLOSURE: Long BGC.
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