ABB: Healthy Dividend At A Discount

I am currently a shareholder of ABB, Ltd., (ABB), and I have been since the fall of 2011 as the share price dropped to $20 and below. As usual, I was keeping up with my stock screener when I initially came across ABB, Ltd. and after I spent some time learning about the company, I was instantly attracted to what they do and the purpose they will serve in the future of energy efficiency. The company is certainly cyclical in nature, but their past operational performance has been fairly consistent, which I thought was remarkable.

For instance, their current operating margin is right in line with their 5 to 6 year average, dividends have been consistently paid since 2006 and are definitely growing, free cash flow looks great over the past 5 to 6 years, financial leverage has come down considerably over the years, ROA and ROIC look very strong and stable, current assets are consistently about 60-70% of total assets - where they're able to retain quite a lot of operational flexibility without holding huge amounts of PP&E and other long-term assets, and goodwill/intangibles aren't excessively high for having a record of making numerous acquisitions. All together, I felt that this company had a lot going for it and there was plenty to like regarding their financial health and performance.

Valuation

Reproduction Book Value: roughly $12

• Current price to book ratio of about 3x - $36

Earnings Power Value: $20 - $22

• Exceeds book value estimate by 1.67 - 1.83x, a very strong sign of an economic moat/competitive advantage
• Current market price of about $21 helps to confirm this estimate is pretty accurate

Franchise Value: $30 - $36

• With the expectation that ABB can continue to consistently produce ROIC in excess of their cost of capital, any future growth will add value and can be translated into an estimate of intrinsic value today

Price to Fair Value Discount: $30 (.70), $33 (.64), $36 (.58)

Overall

With a current discount of 30 - 42%, and a dividend yield of about 3.2%, along with my level of confidence in their ability to perform in line with my expectations of what they've been able to achieve in the past, it's no wonder why I have the highest conviction in ABB as a long-term investment and have made it my largest holding.

Disclosure: I am long ABB.