Dividends, Acquisitions Keep Regal-Beloit Motoring

Regal-Beloit (RBC), based in Beloit, Wis., makes motors used by elevators, food processors, mining machines and more, and it dominates the market for motors used in forced-air heating and cooling systems like you might have at home. It also makes gears and such, which can transmit and magnify the mechanical force produced by motors and generators, which turn motion into electricity, often for use as a back-up power source.

The company has a rich dividend history. It has made more than 180 consecutive quarterly payments, has never decreased its dividend and has increased it more than 30 times. The stock yields just over 1% at present. That might not sound exciting, but as we noted upon first recommending it in August 2004, the real reason to own it is the potential for price gains. Shares have more than tripled the S&P 500 index's gains since that story, climbing 152%. Likewise, they've easily beaten the market since our second and third endorsements of the stock in August 2005 and August 2006. This year we're breaking with tradition to call your attention to the stock in July rather than August. It recently returned to our Not Just Income screen.

Our screen searches for dividends but doesn't get greedy. Anything over 1% is fine. It's stricter about growth, both past and projected. Sales and earnings for surviving companies must have grown by 15% apiece, on average, over the past three years. And shares must look inexpensive relative to current earnings and the rate earnings are expected to grow over the next several years. See our screen recipe for details and use our stock screener to run the search anytime for yourself. It recently found eight promising dividend payers among a starting database of 8,000 companies.

Regal-Beloit has been in business for 52 years and for the past 26 of them has grown mainly through acquisitions, buying 30 companies in whole or part. In 2004 the company doubled in size after purchasing a pair of HVAC motor businesses from General Electric (GE). Its latest purchase, that of FASCO Motors from Tecumseh Products (TECUA) for $220 million, gives it more residential air conditioning business and more sales and manufacturing overseas, particularly in Asia.

Shares of Regal-Beloit fetch a modest 15 times forecast 2007 earnings. For comparison, motor maker Baldor Electric (BEZ), whose shares we recommended just last month in a search for low-volatility stocks, goes for 24 times this year's forecast. The discount for Regal-Beloit is perhaps largely due to the company's exposure to air conditioner sales, which have dipped of late for two reasons. First, home building has slowed. Second, comparisons are made difficult by a jump in air conditioner sales in 2005 and early 2006 spurred by efficiency legislation. Shares might also owe their discount to the company's history of growth by acquisition. Though it has been successful, there are simply fewer big targets for takeovers in today's motor industry.

Despite those concerns, the stock seems a bargain. High energy prices are leading to HVAC efficiency upgrades, which are helping to make up for sluggish new house construction. Unit shipments of HVAC systems increased 7.6% in April and May, vs. a decline of 31.9% in the first quarter, according to investment bank BB&T Capital Markets. It cites the data as evidence that Regal-Beloit's projection of a 7% decline in second-quarter HVAC sales might be too pessimistic. (The company usually reports second-quarter results in late July.) As for acquisitions, the company seems poised to grow profits nicely with or without them. Management reckons that, as it digests the FASCO purchase, it can increase overall operating margin to 15% by 2008, vs. 12% last year.

Wall Street sees earnings per share increasing just 9% this year but 12% next year. Over the next five years the company is expected to grow its earnings by 11.5% a year, on average. That's a couple of percentage points better than the outlook for the broad stock market. And the stock's price/earnings ratio, meanwhile, is about a quarter below the median for companies in the S&P 500 index.