Drill vs. Conserve: Eaton – Dividend Yielding 3.8% -- Offers No Gusher, Just Savings

by Bill Barnhart June 12, 2012

Isaac Newton taught us that for every action there is an equal and opposite reaction. Value investors should apply this axiom to the global industries of energy production and energy conservation. They’ll probably find a bargain in conservation.

The proposed acquisition of Cooper Industries (CBE) by Eaton Corp. (ETN) would combine two international manufacturers of energy-saving equipment. According to Eaton’s CEO Alexander Cutler, “there’s no overlap” in the company’s diverse product lines. Combined 2011 sales total $21.5 billion.

The greater scale would put Eaton on a higher revenue plane than oil and gas producers Apache Corp. (APA), at $16.9 billion in 2011 revenues, and Chesapeake Energy (CHK), at $11.6 billion.

ETN Revenues TTM data by YCharts

Energy conservation, which Cutler calls “power management,” frequently implies eat-your-spinach moralism and political correctness. But saving 25% in a building’s heating, cooling and lighting expense or trimming 30% in fuel costs for an airliner – figures cited by Cutler in a recent analyst presentation – are nontrivial results aided by using the power saving systems that Eaton and Cooper and competitors such as Emerson Electric (EMR) sell.

Eaton and Emerson provide dividend yield in the 3.5% range.

ETN Dividend Yield data by YCharts

And their regular dividend hikes attest to growth in profit.

ETN Dividend data by YCharts

Power management, as opposed to power generation, is not a commodity business. Indeed, research and development in the energy management industry is making it less subject to economic cycles.

ETN Return on Invested Capital data by YCharts

Second, there are no political or environmental impediments to improving efficiency in energy use – if you don’t count a bizarre congressional dust-up over energy-efficient light bulbs. Third, energy management companies Eaton and Emerson Electric have been stable generators of investment returns and dividends, compared to energy generators Apache and Chesapeake Energy.