2 Industrials Stocks That Can Make You Richer Than You Think

Let's be honest: when most investors hunt for growth, industrial stocks aren't usually the first place they look. These companies are often tightly tied to the broader economy, which rarely moves at a blistering pace.

But every now and then, an industrial stock surprises you. The right company with the right product or service at the right time can generate far bigger gains than you might expect. Here's a closer look at two such tickers.

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Despite its name, Illinois Tool Works(NYSE: ITW) doesn't actually make traditional tools in any meaningful way. This conglomerate's portfolio includes restaurant-scale dishwashers, industrial testing equipment, welding supplies, plastic packaging, and auto parts — each run as a largely independent business unit.

And the structure works. With a lean, simplified setup that encourages grassroots entrepreneurship, Illinois Tool Works consistently outperforms its industrial peers. First-quarter revenue rose 5% year over year, and more than 25% of that top line was converted into operating profit despite persistent inflationary headwinds. Analysts expect similar results for the second quarter.

The real engine behind this stock's market-beating growth, however, is a combination of dividends and aggressive share buybacks. This Dividend King — a company that has raised its payout for at least 50 consecutive years — has now increased its per-share dividend for 63 straight years. Over the past decade, the average annual dividend hike has been just over 10%, bolstered by the repurchase of nearly 10% of outstanding shares in just the last five years.

The net result is solid total returns driven largely by reinvested dividends rather than raw price appreciation. But it works.

For income-focused investors, the forward-looking dividend yield sits at 2.3% — a steady stream of cash that can either be reinvested or used elsewhere.

Yes, even though it depends on the ever-changing financial health of consumers, used-car retailer CarMax(NYSE: KMX) is classified as an industrial stock.

The company hasn't performed well lately. After peaking during the pandemic, shares have lost more than 60% of their value, hitting a multiyear low as recently as December.

The headwinds are well-known: the rise of online-only rival Carvana, the growing popularity of ride-hailing services like Uber and Lyft, and the surging cost of used cars — Kelley Blue Book data from Cox Automotive shows the average U.S. used-car price is now back above $27,000, a three-year high.

Consumers themselves may be quietly struggling. According to data from the U.S. Federal Reserve reported by Wards Auto, 90-day auto-loan delinquencies remain at 3%, a level not seen since the recession that followed the 2008 subprime mortgage crisis. That backdrop is clearly a concern for CarMax and its shareholders.

What's often overlooked, though, is the cyclical nature of these headwinds — and the possibility that we may be closer to the end of the downturn and the beginning of a new upcycle than most realize. As Cox Automotive's chief economist Jeremy Robb explains, “Affordability drives demand for used units, but lower new-car sales mean fewer trade-ins, and that means lower used sales for dealers.”

In other words, the biggest challenge facing the used-car industry right now isn't a lack of demand or cautious consumers — it's a shortage of inventory.

That inventory is slowly coming back. Cox notes that nationwide used-car inventories have been rising for several months, climbing from a multiyear low in March to 47 days' worth of supply last month. It's a start.

Or consider this: with the Bureau of Transportation reporting that the average age of cars on U.S. roads is now 12.8 years, and the average new-vehicle price hitting a staggering $49,758 (again per Cox), many consumers may have little choice but to visit their local CarMax soon.

The stock has already climbed more than 40% since the end of last year, rallying 19% in just the past month. That could be a subtle sign that the business has turned a corner — even if most people haven't noticed yet.

Before you buy stock in Illinois Tool Works, consider this:

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James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends CarMax, Lyft, and Uber Technologies. The Motley Fool recommends Illinois Tool Works. The Motley Fool has a disclosure policy.

2 Industrials Stocks That Can Make You Richer Than You Think was originally published by The Motley Fool