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Industrial manufacturer Eaton Corporation’s board of directors approved a 16.7% hike in the quarterly distribution rate to 49 cents from 42 cents.  The new annualized dividend will be $1.96 per share, reflecting an annual dividend yield of 2.59%, significantly higher than the industry average of 1.01%.

The investors were expecting a revision in the dividend rate, as the company exited 2013 on a strong note and portrayed clear visibility regarding its growth prospects in 2014 from 2013 levels.  Eaton will continue to benefit from the Cooper acquisition and its consolidated markets in 2014 are expected to improve by 3% year over year.  

Eaton is expected to generate operating cash flow of $2.7 billion to $2.9 billion, with free cash flow in the range of $2 billion to $2.2 billion in 2014, which we believe is more than enough to pay for the increased dividend. Eaton has a long history of dividend payments, having paid it every year since 1923.

Apart from using its cash generation for dividend payouts, the company is also systematically repaying the debt it incurred to fund the Copper acquisition. If the repayment schedule goes per plans, the company will be able to clear its acquisition debts by early 2016. This will further strengthen the balance sheet of Eaton and lower its interest burden creating possibilities for higher dividend payments.

Eaton expects earnings for 2014 to range from $4.50 to $4.90 per share. The Zacks Consensus Estimate of $4.80 per share in near the higher end of the guidance range.

Eaton currently has a Zacks Rank# 3 (Hold). However, other better-ranked stocks in the industry that are worth considering are Actuant Corporation , EnerSys and Lincoln Electric Holdings Inc. . All these stocks presently carry a Zacks Rank #2 (Buy).

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