2010 Becomes The Year of the Conglomerates (GE, MMM, HON, UTX, BRK-A, SPY, DIA)

2010 may be a directionless year for the stock markets so far, but shares of conglomerates are outperforming and more upside is expected.  The five largest conglomerates we follow are all higher for the year.  We took a look at General Electric Co. (NYSE: GE), 3M Co. (NYSE: MMM), Honeywell International Inc. (NYSE: HON), United Technologies Corp. (NYSE: UTX) and Berkshire Hathaway Inc. (NYSE: BRK-A) to see which conglomerates were outperforming and why.  With a mixed bag between the performance of the SPDRs (NYSE: SPY) and DIAMONDS (NYSE: DIA), the performance so far stands out significantly for all of these large companies.

Conglomerates are supposed to offer safety because of their diversification.  That is the theory, and the theory seems to be working so far in 2010.  They are also generally good for screens when it comes to value investors and dividend investors.  We put together a small table here for comparison of the stocks and the performance.  If there are any discrepancies over the “listed” December 31, 2010 versus the papers on official closes, it is because the figures below have accounted for the dividend effects in the stocks.  We have also shown the year-to-date gains up to the close of Thursday, July 29, 2010 and we even gave an implied upside target to the consensus analyst price objective in the shares.

We have provided price objectives and color on each conglomerate in the field with comparable data on performance, expected performance, dividends, earnings color, and more.

Berkshire Hathaway Inc. (NYSE: BRK-A) (NYSE: BRK-B) is not always considered a conglomerate because of its vast insurance operations and its investment activities.  If GE is not a conglomerate now, we’d like to hear how that is not the case.  Its new BNSF acquisition in rail took it far more into the status of an operating conglomerate with operations in rail, insurance, home building, retail, manufacturing, private jets, and more.  Gone are the days that Berkshire might be considered just a mutual fund.  You can of course track Buffett’s full stock holdings here.

The big changes that came this year after that BNSF deal are also what made it the winner of performance so far in 2010.  It is now in the S&P 500 Index and Russell Indexes, it has split is B-shares to a level that the public can now invest in it, and Warren Buffett has still not named a successor to the empire.  There is also still no dividend, making it the standout name of conglomerates and dividends.  So far this move has generated returns of 17.8% for those holders who owned it at the end of 2009.  The consensus analyst price target is $131,000.00, implying that there is still a projected upside of 12.1%.

General Electric Co. (NYSE: GE) may be down from its highs as its shares went as high as $19.70 in the last year before the pullback came.  The company made it fine through earnings season this July and is managing itself far better than when the rumors and speculation were rampant in early 2009 that the Great Recession could actually have a chance of chewing up GE.  It has shrunk its finance role.  The company is in a deal to get rid of the NBC-Universal dominance with a giant stake sale.  Jeff Immelt told us in an exclusive interview that GE would look at some bolt-on inorganic growth opportunities, and it is managing its cost structure aggressively.

Things are even good enough that Jeff Immelt green-lighted the dividend hike for an implied dividend yield now of 3%.  It has also pledged to immediately begin repurchasing shares of its common stock.  With a gain of 8.1% year to date, GE ranked third of the five conglomerates in share performance.  The kicker and the wild card in the scenario is that analysts actually have GE in the highest light here for upside to its objective price target for a year out.  The consensus analyst price target is $20.50, implying upside of 26.9% from today.  Since this lost the most during the Great Recession, it is not shocking that it still has the most implied upside from research firms.  It is probably going to be a long time before we ever discuss those old $40 prices again, but for now this is the one that analysts have the most implied upside expectations in.

3M Co. (NYSE: MMM) has been a serial dividend raising company.  It has a low enough payout ratio and dividend coverage  ratio that those dividend hikes could be far more.  Its current dividend yield is 2.4%.  The company recently raised guidance for 2010 from $5.40 EPS to a higher range of $5.65 to $5.80 EPS.  It also raised revenue targets to a range of 13% to 15% from a prior 10% to 12% growth.

With a gain of 5.78% so far in 2010, 3M is only #2 of the 5 conglomerates in year to date performance.  Shares have traded as high as $90.00 over the last year, so 3M shares have just lagged in the upside and in the downside.  The consensus analyst price target is $102.43, implying upside of 18.6%.  With that sort of upside expected, with dividend hikes non-stop, higher guidance when the economy is slowing, and a lack of performance, investors could start to write “Buy MMM” on their Post-It notes.

Honeywell International Inc. (NYSE: HON) shows up as a defense firm in some screens, but if you look at the company’s description it is in fact a conglomerate: “Honeywell is a Fortune 100 diversified technology and manufacturing leader, serving customers worldwide with aerospace products and services; control technologies for buildings, homes and industry; automotive products; turbochargers; and specialty materials.”  A conglomerate.  Honeywell was at one point a target for a GE acquisition many years ago.

The conglomerate recently reported earnings with a 4% gain in net income and a better gain in revenues of 8%.  The stock is in the middle of its 52-week trading range despite is double-digit gains so far in 2010.  The consensus analyst price target is $51.28, implying upside still remains of 20%.  The company recently posted earnings ahead of estimates and it lifted its guidance for the year into a slowing economy with a new range of $2.40 to $2.50 EPS from its prior $2.30 to $2.45 range.  The dividend comes in at 2.80% and its new earnings guidance and analyst estimates should leave it with room for dividend hikes despite the notion that Friday’s dividend announcement for a payout of $0.3025 being the same as it has for the last six quarters.

United Technologies Corp. (NYSE: UTX) is the laggard of the conglomerate sector.  Shares have only gained 3.77% so far in 2010, making it the smallest gain of the five conglomerates.  The company dropped about 11,000 workers last year and recently disclosed that about 1,500 more pink slips are planned in its headcount reduction of 14,000.  The company’s profits grew by 14% in the most recent earnings report and it raised guidance for 2010 to a range of $4.60 to $4.70 EPS from a prior range of $4.50 to $4.65 EPS (includes restructuring and one-time items).  The consensus analyst price target is listed at $82.07, implying 15.3% upside to the consensus target.

The company boosted its 2010 dividend payout two quarters ago and the current yield is 2.40% for dividend investors.  With it being a laggard and only 10% south of a 52-week high and with a lower dividend yield, investors are not getting excited here.  Maybe the company should announce that it is hiring live bodies rather than adding to the weekly jobless lines.

IN REVIEW…

It was surprising to see that the conglomerates are up this much when you consider that conglomerates really are supposed to be mini-representations of the broader stock market.  The S&P-tracking ETF in the SPDRs (NYSE: SPY) at $110.29 is down by less than 1% on the year from a December 31, 2009 adjusted closing price of $110.91.  The DIAMONDS (NYSE: DIA) at $104.67 are up about 1.5% versus an adjusted closing price of $103.05 on December 31, 2009.

So far Berkshire Hathaway has led the pack of conglomerates in performance.  Analysts are still looking for good upside in their objective price targets for a year out, and the pack actually has General Electric slated to have the most upside.  We recently noted in the 10 Biggest Dividend Stories of 2010 that the Chinese calendar should have called 2010 “The Year of the Dividend.”  Maybe it should really be “The Year of the Conglomerate.”

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JON C. OGG