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Who's the Best Conglomerate to Invest In?

Added on by Gordon Gekko .

Be sure to check out our detailed stock analysis (click here). There are a number of diversified products company in the markets; companies that make products for a variety of industries. These companies have impressively diverse revenue streams, which usually afford them low-volatility, making them great investment opportunities despite the economic backdrop. What's more is that all of these stocks also pay a dividend. 

Five of the best stocks in the industry include General Electric ((NYSE: GE)Honeywell International (NYSE: HON)United Technologies (NYSE: UTX), 3M Co (NYSE: MMM)and Siemens AG (NYSE: SI)

Top conglomerate pick

GE gets around 30% of its revenue from GE Capital, which includes consumer lending and financial solutions. Although this arm struggled through the financial crisis, it's encouraging that GE is moving away from the struggling financial sector, including the announcement that it plans to sell its entire stake of Thailand's Bank of Ayudhya. 

Power and water (19% of revenues) is another key segment of GE's, which includes producing various turbines, generators and renewable energy solutions. GE also provides products to the oil and gas industry (10% of revenues), which includes equipment for onshore and offshore projects. GE's other key growth segment is healthcare (12% of revenues), which includes medical imaging and information technologies. 

One of GE's best growth initiatives lies in the energy markets. The company should see global growth thanks to increased demand for energy production and fossil fuel alternatives. GE already offers one of the most efficient and reliable wind turbine fleets and various efficiency improving power plant tools. GE also has a strong international presence, where more than 50% of total revenue is generated from emerging markets.  

Honeywell International is another revenue-diversified company, with 40% of revenue from control solution (environmental, sensing and security controls), 30% from aerospace, 16% from performance materials and 10% from transportation. Although Honeywell has a low beta, I believe there are better industry picks given the company's over-weighting toward aerospace, which is tied heavily to defense budgets and discretionary spending. GE's aviation segment only makes up 13% of revenue. However, a positive is that Honeywell hopes to enter the fast growing healthcare segment with its December 2012 acquisition of bar-code manufacturerIntermec. 

How does GE stack up against some of the conventional economic bellwethers? Speaking to the diversity is the fact that GE's beta is lower than most of the conventional economic bellwether companies. 

GE and Honeywell, two staples in the diversified products industry, have much more diversified revenue streams compared to Caterpillar and Deere, which make them inherently less volatile. 

Another great pick

I think that Siemens is another great diversified products pick, being a global leader in all of its top segments, including industrial automation, power generation, medical equipment and transportation. One key benefit to Siemens is its geographical breadth, which gives the company vast exposure to the developing markets. That should be a key growth driver going forward as these emerging nations look to build up infrastructure. Siemens is one of the great dividend stocks that are based outside of the U.S., Vodafone and Unilever are just a couple others.

The infrastructure and cities segment (22% of 2012 revenues) will play a key role in this infrastructure buildup. This segment offers various sustainable solutions ranging from transportation, logistics, building and smart grid technologies. Its largest segment, energy, (35% of 2012 revenues) is exposed the ever chaining and developing energy industry, where the company provides power generation and renewable energy solutions. The next largest segment is Industry (26% of 2012 revenues) and includes various industry and building solutions.

Although one of its smaller segments, healthcare (17% of 2012 revenues) is expected to be one of its fastest growing. This segment includes hearing instruments, imaging systems, therapy equipment and entire intensive care units. The big driver for this segment will be Siemens' access to emerging markets, where healthcare is becoming an increasingly important topic.  

The rest

A couple of other major diversified-products companies include United Technologies and 3M Co. However, I still think that GE and Siemens are better industry picks. United Technologies is known for its high-end tech products for the building systems and aerospace industries. The one downside to this company is its overexposure and over-reliance on the aerospace and construction industries. This makes the company highly dependent on the U.S. government's budget allocation for defense. What's more is that the company has increased its exposure to the aerospace industry with its 2012 acquisition of Goodrich and majority ownership in the International Aero Engines.

3M Co is a major industrially-diversified products company; however, it has less exposure to some of the rapidly growing industries, compared to GE and Siemens. 3M derived over 33% of its 2012 revenue from tapes and non-woven abrasives for the auto, marine and aircraft industry. Its other major segment, consumer and office, is 15% of revenue and is heavily tied to discretionary office spending and home improvement. Although I think that GE and Siemens are better positioned than 3M for the time being, this company is definitely worth keeping an eye on. The company has a healthcare segment (18% of revenues) that is heavily invested in the drug delivery and infection prevention areas, two potential areas for high growth. 

Don't be fooled 

All of these companies have an impressively diverse stream of revenues that allow them to trade with relatively low volatility given their insulation from broad economic swings. But why do I like GE and Siemens the most? Well GE has one of the lowest betas among bellwether companies and Siemens has impressive international exposure, but it's more than just that; digging a bit deeper, it appears that GE and Siemens are the cheapest, but they also pay the highest dividend yields. 

 What makes Siemens even more compelling is the fact that its balance sheet is one of the top among the five companies, with a debt ratio of only 19%, compared to GE's 61%. I think either GE or Siemens are great plays on the broader economy and each pay a solid dividend to investors.