In a low-yield world, where's an income investor to turn? Certainly not to the Marriner S. Eccles Federal Reserve Board Building, where Janet Yellen and her cohorts dither on monetary policy. As recent "dovish" statements from Fed governors indicate, the central bank probably won't lift interest rates from rock-bottom levels before the year is over.
In this uncertain investment climate where reliable income is hard to find, consider the following three companies that reported encouraging earnings this week: Brinker International (EAT - Get Report) , Pentair (PNR - Get Report) and United Technologies (UTX - Get Report) . Each company is tapped into long-term trends that will continue to drive their earnings growth and dividend yields.
Not only do these stocks confer the opportunity for outsized capital appreciation, but they also sport above-average dividend yields that appear sustainable. What's more, they're now trading at bargain levels relative to their respective peers. As such, my recommendations hit the trifecta of income, growth and value.
Brinker International reported Tuesday that third-quarter earnings rose 1.4% year-over-year, boosted by stronger margins and cost efficiencies. Brinker reported earnings of $33.2 million, or earnings-per-share of 54 cents, up from $32.7 million, or 49 cents, from the same period a year earlier. Revenue increased 7.2% year over year to $762.6 million.
Brinker is an established player in an increasingly competitive landscape: "fast casual" dining. Fast food is increasingly pervasive around the world, but the U.S. accounts for the majority of the market at 40% of global revenue. Over 25% of the U.S. population consumes fast food every day.
But fast food is giving way to an emerging style of restaurant, the so-called fast casual that occupies a niche in-between hamburger drive-throughs and formal restaurants with linen napkins and wait staff. Fast casuals are propelling growth in the restaurant segment, at the expense of traditional fast-food chains such as McDonald's, which are rapidly losing market share as fickle consumers deem them as unhealthy and passé.
According to the NPD Group consultancy, fast casual operators should rack up a compound annual growth rate of at least 10% over the next five years, compared to low single digits for its competing segments.
Fueling this trend has been a lasting change in eating habits in the wake of the recession of 2008-2009. Despite the economic recovery, consumers still haunted by the downturn are forsaking fancy restaurants for higher-quality fast food that's served in a congenial sit-down ambiance. The average fast casual meal costs between $7 and $11 and generates higher profit margins than ordinary fast fare.
Dallas-based Brinker owns, operates or franchises about 1,600 restaurants under the names Chili's Grill & Bar (1,550 restaurants) and Maggiano's Little Italy (50 restaurants) worldwide. Chili's is a 39-year-old chain and a pioneer in fast casual dining, with high consumer awareness and loyalty. The parent company is undertaking a remodeling program for Chili's and Maggiano's, simultaneously with the introduction of new menu items for the health-conscious.
Brinker's stock sports a dividend yield of 2.5%, compared to the current average dividend yield of 2.09% for the S&P 500. With a trailing 12-month price-to-earnings (P/E) ratio of 15.8, Brinker is now a bargain compared to the P/E of 38.1 for the overall restaurant sector.EAT data by YCharts
Based in Schaffhausen, Switzerland, Pentair designs, manufactures, markets and services fluid management products and solutions, including pumps, valves, pipes, valves, and fittings. With a market cap of $10 billion, the company serves several industries, including oil and gas, chemical, petrochemical, power generation, mining, food and beverage, pulp and paper, wastewater, commercial irrigation and mining.
Pentair also manufactures products that protect sensitive electronic equipment, including heat management solutions for electrical distributors, data center contractors and maintenance contractors.
Pentair is a major beneficiary from the fight against global warming. As the growing incidence of extreme weather wreaks havoc on the planet, one of the major problems is persistent drought. Pentair helps provide end users of all types with the increasingly precious commodity of potable water.
On Tuesday, Pentair reported third-quarter EPS of 97 cents, down from EPS of $1.11 in last year's third quarter. However, Pentair beat the consensus earnings estimate by 1%. Third-quarter earnings also came in at the upper end of the management guidance of EPS in the range of 94 cents to 97 cents.
Pentair's management updated its fiscal 2015 EPS guidance to a range of $3.84 to $3.86, up from the previous guidance of $3.80 to $3.90.
With a solid dividend yield of 2.26%, this stock offers both capital appreciation and income and it's a great play on the accelerating demand for clean water and environmental remediation. As a sweetener, the stock sports a trailing P/E of only 53, compared to the P/E of 123.2 for its sector of industrial equipment and components.
Based in Hartford, Conn., United Technologies develops and provides high technology products and services to the construction and aerospace industries.
With a market cap of $82.8 billion, United Technologies is heavily reliant on the aerospace industry, a sector now in the ascendancy. However, the company also enjoys a highly diversified product portfolio that protects it from the ebbs and flows of its cyclical businesses.
On Tuesday, UTX reported EPS of $1.67 on $13.79 billion in revenue, compared to the average Wall Street expectation of $1.55 in EPS on revenue of $14.56 billion. During the same period in the previous fiscal year, the company posted EPS of $2.04 on $16.17 billion in revenue.
Management provided full-year guidance of EPS in the range of $6.15 to $6.30 and for revenue in the range of $57 billion to $58 billion.
United Technologies' business divisions include Pratt & Whitney, builder of aircraft engines, gas turbines, and rocket engines; Otis, manufacturer and servicer of elevators, escalators, and moving walkways; Carrier, maker of heating, ventilation, and air conditioning units; and United Technologies Fire & Security, maker of fire detection and suppression systems, access control systems, and security alarm systems.
Through Otis and Carrier, United Technologies is the world's largest maker of elevators and air conditioners, products that are experiencing greater demand as commercial and residential construction activity picks up. As another advantage, urbanization will remain a powerful force throughout the next decade, providing large contract possibilities for Otis, Carrier and United Technologies Fire & Security.
This year, UTX sold its Sikorsky Aircraft business, which makes military and civilian helicopters, to Lockheed Martin for $9 billion in cash.
Despite its growth prospects, United Technologies' stock has a trailing P/E of only 13.3, compared to the P/E of 33.1 for its sector of industrial goods. The stock also offers a healthy dividend yield of 2.75%.
Frustrated by high volatility combined with low yields? Click here for a list of growth stocks that sport robust dividends.