Conglomerates are really a fun sector to dissect. Because of their diversified business operations, buying into one company can sometimes diversify your portfolio across numerous sectors. For example, you can buy shares of General Electric (NYS: GE) and own a business involved in the technology, energy, media, health care, and financial sector. Not bad diversification for just one purchase right?
The only downside to the conglomerate sector is its lack of choices. With so few companies operating under multiple business sectors, we have to be pickier than ever in choosing high-quality dividend-paying companies, otherwise we risk getting stuck with a jumbled mess of a company. After researching the group, a few names stand out as solid candidates to provide steady dividend income while also offering the potential for long-term price appreciation. On the flipside, one highly loved Motley Fool CAPS name could turn out to be a bane to investors' portfolios.
United Technologies (NYS: UTX) -- trust it
United Technologies is a do-it-all for the technology, manufacturing, and aerospace industries. The company operates out of six business segments:
Otis is by far the company's most established and highest margin business segment. If Otis is doing well, there's a good chance that United Technologies is also kicking butt. From the company's most recent quarterly report, revenue rose 8.6% to more than $15 billion on a 6% jump in organic sales. Fueling this growth was a 12.5% jump in revenue from the Otis segment on the heels of a 23% jump in new equipment orders. Gross margin and operating margin expanded moderately as well.
This sort of growth is nothing new to United Technologies, but it's rewarding of shareholders recently seems even more accelerated than its historical average. Not only has the company repurchased $1.5 billion worth of its own stock year-to-date, but it's planning to purchase approximately $2.5 billion worth of additional stock before the year is out. In the past five years, United Technologies has also grown its dividend annually by 12.6%. While its current yield of 2.3% might not seem like much, if you add the company's share buybacks and recent earnings guidance boost to the equation, you'd have a very hard time finding much, if anything, better.
3M (NYS: MMM) -- trust it
Much like United Technologies, 3M is divided into six business segments across a wide swath of sectors:
In its most recent quarter, 3M turned in 14.1% revenue growth over the year-ago period and exhibited growth in five out of its six business segments. Better-than-expected strength in its adhesive and renewable energy products led to a 17.5% increase in revenue for its industrial and transportation segment -- its largest division by revenue. Only the display and graphics division demonstrated a revenue contraction, and some of that can be attributed to supply chain weaknesses related to the March earthquake in Japan.
If this earnings report was any indication of global economic health, I think it's safe to say that 3M is well-positioned since all economic regions showed solid revenue growth. The company was able to generate another $1.2 billion in free cash flow during the quarter, which should continue to benefit shareholders where it counts -- in the dividend column. Outside of a special dividend in 1996, shareholders have been privy to a steady incline in their quarterly payouts for the past 40 years. Currently yielding 2.3% and having recently upped its earnings guidance, 3M appears to have what it takes to add a bottom-line boost to your portfolio.
Leucadia National (NYS: LUK) -- avoid it
I'm clearly not going to make any friends by picking on this five-star Motley Fool CAPS conglomerate, but negative recent trends among Leucadia's business segments are simply too great to ignore.
Leucadia is involved in the telecommunication, manufacturing, land-based contract oil and gas drilling, property management, gaming entertainment, real estate activities, medical product development, and winery operations. Some have dubbed Leucadia as a little Berkshire Hathaway (NYS: BRK.A) (NYS: BRK.B) because of the myriad sectors represented, but I'd like to remind readers that Berkshire is on considerably more stable ground than Leucadia.
It might seem odd to pick on Leucadia's potential growth considering its trailing P/E is just 4.5, but I have little faith in the company's ability to keep its gross margin at levels nearly double its historical average. Leucadia's earnings potential is being hurt by a bunch of reasons -- most notably a weak housing market. Not only is weak housing demand hurting the company's Idaho Timber business segment, but it is also putting a cap on the company's manufacturing and gaming revenue. The company's medical segment is also relatively small and currently not bringing in any recurring revenue. Finally, we have the company's winery operations that did see a boost in revenue, but also a considerable spike in input costs. In sum, Leucadia's business operations appear to be reversing course, and that's a wave I wouldn't want to be standing in front of.
Even worse is the company's paltry annual dividend that recently returned after a two-year hiatus. Currently yielding a paltry 0.7% and with no guarantee that Leucadia can maintain its robust margins, I have to recommend parting ways with this stock.
Big businesses don't have to yield big dividends to have a big effect on your wallet. Conglomerates are a unique way of diversifying across multiple sectors with a single purchase and generally offer the potential for solid long-term growth with a steady dividend. Look for United Technologies and 3M to continue to deliver above average results well into the future.
Would you invest in United Technologies or 3M right now? Share your thoughts in the comments section below and consider adding United Technologies, 3M, and Leucadia National to your watchlist to keep up on the latest news in this highly diversified sector.
At the time thisarticle was published Fool contributorSean Williamshas no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen nameTMFUltraLong. The Motley Fool owns shares of Berkshire Hathaway.Motley Fool newsletter services have recommended buying shares of 3M, and Berkshire Hathaway. Try any of our Foolish newsletter servicesfree for 30 days.We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has adisclosure policythat never looks a gift horse in the mouth.
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