ABB: Fusing dividend growth with AI and robotics innovation

My latest addition to the Wealthy Owl Dividend Growth Portfolio represents a unique fusion of dividend growth and the potential of AI and robotics. ABB was founded 130 years ago to take advantage of a new technology called electricity. Originating from the pioneering efforts of its predecessor companies, ABB Ltd. (OTCPK:ABBNY) embarked on a mission to help society harness the power of this transformative new technology.

Today, we stand on the cusp of a similar technological revolution with Generative Artificial Intelligence (GenAI). Just as electricity adoption had second and third-order effects on productivity, safety, manufacturing, domestic life, economic growth, urbanization and new forms of entertainment, GenAI will also have massive ripple effects. GenAI's impact will extend far beyond the tech industry, it is poised to reshape various parts of society and the economy through its capacity to analyze vast datasets, predict outcomes, and generate novel content.

One of the downstream sectors that GenAI will likely reshape is a big part of my investing thesis for ABB, its extensive robotics and automation product portfolio. Thanks to cutting-edge generative AI techniques, robots can now master intricate tasks by observing human demonstrations. This groundbreaking advancement enables generalizable robotics by empowering robots to acquire fresh skills with minimal examples, all without altering their fundamental code. The concept of diffusion policy, forged through collaboration with respected institutions like Columbia and MIT, has facilitated the teaching of 60 distinct skills to robots.

Generative AI Optionality

Already a $3.6B business for ABB, GenAI promises to increase the capabilities of ABB's robotics and automation products to work in unstructured environments, interact and respond to human commands through voice, and use synthetic data to train its robots on new tasks. As explained by ABB's Robotics and Discrete Automation division President Sami Atiya, ABB is well positioned build on its existing use of AI in robotics to play a lead role integrating GenAI into the growing market.

The AI Robotics market is expected to grow at an annual rate (CAGR 2024-2030) of 11.63%, reaching US $36.8B by 2030.

ABB is investing in R&D across US, Europe and China robotics facilities, so it can play a market leading role in the GenAI powered use case expansion of the robotics industry. I see revenue growth upside potential for ABB from the GenAI optionality on its robotics and automation business. Approximately 70% of ABB's robotics sales are direct to customers, providing the company a strong foundation to potentially upsell a new generation GenAI powered robots to its existing customers.

The optionality on ABB's business that GenAI creates is not exclusive to its robotics and automation business. ABB runs a diversified business that includes a line of electrification products, solutions and services ($14.6B revenue) and portfolio of drives, electric motors, generators, and motion controls ($7.8B revenue). ABB stands to benefit from applying GenAI across all business lines to grow revenue and expand margins. The company appears to be "all-in" on GenAI and its transformational potential on the group. The company's leadership is not just adapting to this new era; they are actively shaping its trajectory.

"We are certain that generative artificial intelligence (AI) has tremendous potential for our business. We have already identified more than 100 AI-focused projects across our group."

- ABB CEO

While ABB may continue to benefit from AI secular tailwinds in the months and years ahead, it has already gotten a strong AI-powered boost in the stock market over the last 12 months, gaining 43% (as of April 6, 2024). Let's not overstate this upside in our evaluation of the stock. ABB is not a high growth company, many analysts model 5% revenue growth over the next year. I am not adding ABB to my dividend growth portfolio expecting premium revenue growth (i.e., 20%+ revenue growth), just some small potential upside beyond analysts current forecasts to serve as an appetizer to ABB's main course of returning capital to shareholders.

Commitment to shareholder returns

ABB conservatively manages a decentralized group of businesses and enjoys a number one or two market position in two thirds of its product segments. The company has a strong track record of profitability. Its stability and well managed balance sheet is what allows ABB to reward shareholders with dividends and buybacks.

ABB has paid a dividend for 18 straight years, growing it at an average 5% annually over the last five. The stock currently sports a 2.16% dividend yield and appears to be quite safe with a 45% payout ratio.

Over the past five years, ABB's earnings per share (EPS) have seen some fluctuations, but on average, there's been an impressive annual growth of 40% from 2019 to 2023. Looking ahead, I believe ABB can maintain this growth trajectory, thanks to cost savings and operational improvements driven by Gen AI. The company's strong commitment to rewarding its shareholders is evident in its actions over the past decade, having returned over $29 billion through dividends and share buybacks. This sets a strong precedent, but they are well positioned to continue to prioritize shareholder returns well into the future.

A Note on valuation

At a forward P/E of 21, ABB appears to be reasonably valued and inline with its competitors (Rockwell Automation - 21, Honeywell - 19, Schneider Electric - 26). Based on Morningstar's fair value estimate of $41, one could argue they are slightly overvalued relative to the current share price of $46.32 (as of April 5th, 2024). The electronification, GenAI, and robotics/automation secular are responsible for pushing ABB's stock price, and its peers, to new highs. However, given my expectation for these long-term trends to continue and my strategy to hold for an extended period, I'm not seeking the ideal entry price to begin a position.

Risks

1. Earlier this year, ABB announced Bjorn Rosengren will be retiring as CEO and will be replaced by company veteran and current president of the electrification group Morten Wierod. Rosengren has been a very successful CEO for ABB, helping improve the group's EBITA margin from 11% to 17% during his tenure. While incoming CEO-to be Wierod appears to be a suitable replacement, any CEO transition brings a low level of risk to be aware of.

2. China has been a pivotal market for ABB, playing a crucial role in the company's expansion in recent years. However, the company's prospects in the country have worsened. Given the present economic environment, China is expected to pose challenges.

The bottom line

While ABB may not be the flashiest name in the dynamic fields of robotics and AI, it is worth a look for investors seeking dividend growth, along with upside potential coming from an anticipated AI driven surge in robotics and automation adoption.

I have added a position in ABB to the Wealthy Owl Dividend Growth portfolio and as of this posts publish date (January 8th, 2023) its stock price is $46.32.

As with any investment decision you make it’s important to complete your own due diligence and assess if the investment matches your risk profile. Like any individual stock there is risk. You are entirely responsible for your own investment decisions.