5 Conglomerates For Dividend Growth Investors

One of the most powerful concepts in investing that will preserve your wealth over time is that of diversification. Diversification comes in many forms such as industry diversification, time diversification (also known as dollar cost averaging), and geographic diversification (international sales).

A certain type of stock called a “conglomerate” is perhaps the only case where you might consider buying just a single stock since such a business is naturally diversified. What is a conglomerate? Simply stated it’s a collection of businesses owned by a single business entity. One of the most well known conglomerates on earth is Warren Buffet’s own Berkshire Hathaway.

We recently completed assembling our 30-stock Quantigence DGI Portfolio, and discovered that we are now holding 5 stocks that (according to Wikipedia) are considered to be conglomerates. While GICS does offer a “conglomerates” industry classification, not all conglomerates are classified as such. Let’s trust Wikipedia for a moment and take a closer look at what each of these 5 conglomerates actually does.

GICS Industry Classification = Industrial Conglomerates

For some reason when we hear the name 3M we always think of post it notes. The truth is that 3M has an astounding amount of products with18,944 products listed on their U.S. website for businesses alone. These products span 5 business groups with revenues broken down as follows:

  • (Health Care – 17.9%)
  • (Consumer – 14.6%)
  • (Electronics and Energy – 17.2%)
  • (Industrial – 34.1%)
  • (Safety and Graphics – 18.2%).

Note that 3M is the only one of these 5 conglomerates that actually has a GICS industry classification of “conglomerate”.

Dover Corporation (NYSE:DOV)
GICS Industry Classification = Machinery

Describing itself as a diversified global manufacturer, Dover Corporation breaks down their business into 4 distinct segments:

  • (Energy – 21%) Advancing the efficiency and safety of oil and gas extraction
  • (Engineered Systems – 34%) Printing, identification, vehicle service, aerospace and waste handling equipment
  • (Fluids – 20%) Fluid transfer and dispensing equipment and systems
  • (Refrigeration and Food Equipment – 25%) Refrigeration, heating/cooling systems, and food/beverage packing

What makes Dover Corporation even more diversified is that under each of these segments are at least 6 unique brands that operate independently. This allows Dover to easily acquire new brands or dispose of lagging brands such that they manage their portfolio of businesses in the same way we manage our own portfolio of DGI stocks.

Parker Hannifin (NYSE:PH)
GICS Industry Classification = Machinery

Take a look at the Parker Hannifin 2015 10-K and you might just see the most succinct 10-K you’ve ever seen from any publicly traded company. Their financials are broken into two reporting segments as follows:

  • (Diversified Industrials – 82%)
  • (Aerospace Systems – 18%)

Now this is where things get a bit tricky. Parker Hannifin doesn’t break the “Diversified Industrials” segment down any further by revenues, only by group as seen below:

  • Automation Group
  • Engineered Materials Group
  • Filtration Group
  • Fluid Connectors Group
  • Hydraulics Group
  • Instrumentation Group

What they do let us know is that this segment sells to over 445,000 different customers who represent virtually every significant manufacturing, transportation, and processing industry with no one customer accounting for more than 4% of the Company’s total net sales. Their distribution network extends across 104 countries with 13,000 locations globally. It’s fair to say that their revenues streams are about as diversified as they come.

Proctor and Gamble (NYSE:PG)
GICS Industry Classification = Household Products

Now here’s where we start to scratch our heads a bit and wonder just whether or not P&G should actually be classified as a conglomerate. Here’s how they break down their reportable segments:

  • (Beauty, Hair and Personal Care – 24%)
  • (Grooming – 10%)
  • (Health Care – 10%)
  • (Fabric Care and Home Care – 29%)
  • (Baby, Feminine, and Family Care – 27%)

Now let’s face it. If you just bought a new home and you’re going grocery shopping, every single one of these household items would end up in your shopping cart. Is this really a conglomerate?

The answer might lie in the way that P&G manages their business; as a portfolio of brands, many of which they are quick to point out are “billion dollar brands”. Managing a collection of brands seems to be not much different from managing a collection of businesses which matches the traditional definition of a conglomerate.

The Coca-Cola Company (NYSE:KO)
GICS Industry Classification = Beverages

If we were scratching our heads about whether or not P&G should be classified as a conglomerate, now we’re really experiencing some doubt. How can the world’s largest supplier of beverages be a conglomerate when all they supply is beverages?

Looking at Coca-Cola’s reporting segments doesn’t help much since they simply break down their revenues by geography. What is useful to know is that they control over 500 nonalcoholic beverage brands, all of which target various price points and consumer types. When Coca-Cola talks about owning upwards of 20 “billion dollar brands”, they are similar to P&G in that they manage a collection of mini-businesses in the form of brands. When you manage brands and serve 1.9 billion beverages a day, you can easily acquire and dispose of brands much in the same way a “traditional conglomerate” of businesses can acquire and dispose of businesses.

As we discussed previously, our Quantigence Q-Score Methodology uses 7 factors to help determine the likelihood that a dividend growth stock will continue increasing dividends in the future. The 7 growth factor values for these 5 conglomerates can be seen in the below table:

(click to enlarge)

Now we can take these 7 factors and use them to come up with our Q-Scores as seen below:

(click to enlarge)

In our universe of stocks we typically see a high Q-Score as one that is above 18 or so. In this case, the long track record of increasing dividends and high international sales gives all 5 of these conglomerates quite strong Q-Scores.

However, conglomerates are not without their downsides. It comes exceedingly difficult to manage the financial reporting across multiple businesses and cultures can clash. When you have such diversified brands it means that you can lose opportunities for synergies across segments. There is also said to be a mystical “conglomerate discount” which affects these types of stocks, implying that the market doesn’t quite buy the whole “sum of parts” notion.

It’s interesting to note that all 3 DGI stocks we picked in “Industrials”(DOV,MMM,PH) happen to be conglomerates. It seems that this sector is more apt to benefit from a conglomerate structure and it certainly shows in the track records of all three companies. To conclude, these 5 conglomerates are all great stocks with high Q-Scores and we don’t see their dividend growth track records ending any time soon.

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