ABB: Global Infrastructure

06/09/2016 10:00 am EST


Richard Stavros

Analyst, Global Income Edge, Utility Forecaster and Personal Finance

Infrastructure spending suffered in recent year, but analysts are now forecasting increases of 3% to 6% per year on vital projects such as roads, communication and power grids, explains Richard Stavros in Global Income Edge.

Switzerland-based ABB (ABB) is mainly an automation, robotics and power grid company. Infrastructure spending will increase in both developed and developing countries, with the latter juicing up ABB sales.

ABB had a tough couple of years in 2014 and 2015, when revenue declined and profits dropped $854 million, prompting the stock price to plummet 41%. But ABB's infrastructure business is finally looking up.

Infrastructure spending will increase in both developed and developing countries, with the latter juicing up ABB sales. About 37% of its 2015 sales came from emerging markets in Asia, the Middle East and Africa.

China is a major market for ABB because a rural population migrating into cities puts pressure on the country's urban infrastructure. Infrastructure also matters in India, where cities will add 500 million people over the next four decades.

In Europe, green technology will be key. The UN's Paris Agreement requires using more renewables and biofuels by 2020. As a result, renewable power will account for most new infrastructure spending over the next decade.

Last April, ABB launched YuMi, the first two-arm factory robot designed to work safely alongside humans. At a relatively low cost of about $40,000 per robot, YuMi is ideally priced for Chinese and Indian manufacturers that are beginning to automate their factories.

ABB also just landed a five-year contract to provide generators, motors, switches and breakers for Shell's floating liquefied natural gas facility, the world's first offshore.

Then Dong Energy awarded ABB a $250 million contract for high-voltage cables to connect the UK's mainland power grid to a wind farm in the North Sea.

With ABB's turnaround already evident in its revenue, higher earnings will follow. With 2015 free cash flow of $2.98 billion and a dividend payout ratio of 88%, ABB - yielding 3.6% - should offer excellent income for many years.

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