Eaton (ETN) shares several characteristics with some of the companies we hold in our Top 20 Dividend Stocks portfolio.

The company scores well for Dividend Safety and Dividend Growth, has paid dividends every year since 1923, generates excellent free cash flow, and has a relatively high dividend yield near 3.7%.

Eaton’s stock also trades at a forward price-to-earnings multiple of 14.2, which is a discount of approximately 15% compared to the broader market.

Let’s take a closer look at Eaton and see if it makes the cut as one of our favorite blue chip dividend stocks.

Business Overview

Eaton is a large industrial conglomerate with over $20 billion in annual sales and an operating history dating back to 1911.

The company provides a wide range of energy-efficient products and systems that help customers manage power across electrical, hydraulic, and mechanical applications.

Eaton also has a substantial aftermarket business (approximately 20% of total sales) that provides some stability to its business.

By geography, about half of Eaton’s sales are made outside of the U.S. with approximately 25% of total sales derived from emerging markets.

Segments

Electrical Products & Systems (62% of sales; 62% of profit): sells a range of power-related components, circuits, lighting products, and equipment used wherever there is demand for electrical power (e.g. buildings, data centers, hospitals, utilities, factories).

Vehicle (18% of sales; 20% of profit): supplies drivetrain and powertrain systems and components used in cars, trucks, and agricultural vehicles. Key products include transmissions, clutches, engine valves, and superchargers.

Aerospace (9% of sales; 10% of profit): sells fuel, hydraulics, and pneumatic systems used in commercial and military aircraft. Products include pumps, motors, controls, sensing products, hose fittings, and more.

Hydraulics (12% of sales; 8% of profit): sells components and systems such as pumps, motors, valves, and controls that are used in industrial and mobile equipment. Key end markets are oil and gas, agriculture, construction, and mining.

Business Analysis

Many of Eaton’s competitive advantages are derived from its lengthy operating history. The company has been in power management for more than 100 years.

As a result, Eaton has built up a strong reputation for quality, massive distribution channels, an extensive portfolio of well-known products, and long-lasting customer relationships.

Smaller and newer players have a hard time competing with Eaton for many of these reasons. They lack Eaton’s economies of scale (over $20 billion in annual revenue), which allow the company to maintain a lower manufacturing cost structure.

Eaton can also afford to pump more than $600 million in research and development activities each year to maintain the broadest, most advanced portfolio of technologies and established brands.

This is important because many of its products solve the most demanding power needs. The company supplies mission critical products that need to be extremely reliable.

In aerospace, for example, Eaton benefits from long product qualification cycles and meaningful aftermarket demand. Once Eaton’s components and systems have proven to be reliable and are designed in, the company enjoys a long stream of high-margin aftermarket revenue.

The company’s aftermarket business makes life difficult for new entrants as well. Eaton generates over $4 billion in annual sales from aftermarket products and services, helping it maintain stickier customer relationships and retain its reputation for quality.