1 ESG action to create a growing stream of passive income

Maker Trane Technology (NYSE: TT) is firmly entrenched as an ESG company. ESG stands for Environment, Social and Governance; the label is intended to indicate a company’s efforts in areas such as climate control, employee equity and fair corporate governance. Trane is an ESG leader, particularly on the environmental front.

The company is also established as a dividend payer that has consistently provided shareholders with a passive income stream for many years. Trane’s second quarter earnings report showed dramatic numbers on both fronts. Let’s take a closer look.

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Recognized ESG winner

Trane’s innovative heating and air conditioning units reduce greenhouse gases and allow commercial and residential users to use energy more efficiently. Perhaps most importantly, they save customers money on energy expenses. Trane customers include commercial enterprises such as data centers, healthcare facilities and schools, all of which consume tons of energy and serve large groups of people. The cost savings that can be generated by keeping their buildings running smoothly and people comfortable in an efficient manner can be significant and simultaneously accelerate sustainability goals.

Trane’s Thermo King-branded transport refrigeration segment does the same for the supply chain. Its customers rely on Thermo King to transport food, pharmaceuticals and other products that need to be kept cold. Energy efficiency cost savings are also at play in transport refrigeration, but with the additional savings resulting from reduced food and medicine spoilage.

Trane also has its own goals. The company plans to reduce its customers’ CO2 emissions by one gigatonne by 2030. By making progress towards its ESG objectives, Trane has been recognized by its peers in the investment world. The company has been included in the Dow Jones Sustainability Indexes for 11 consecutive years, and the morning star Sustainalytics has identified Trane as an industry leader in ESG.

Inspirational Q2 numbers

In his webcast regarding Trane’s second quarter earnings report, CEO David Regnery highlighted the megatrends in energy efficiency and decarbonization when he said:

Trane Technologies is proud to lead our industry with bold sustainability commitments and actions to support it. Our innovation is accelerating the decarbonization of commercial buildings, homes and transportation.

The earnings report presented some inspiring numbers for the company’s second quarter. Organic revenue rose 11% year-over-year to $4.2 billion, and adjusted continuing earnings per share jumped 13% to $2.16. More encouragingly, the company noted that organic bookings were up 7% for the quarter and 37% from pre-pandemic bookings. Longer term, Trane expects its backlog to remain strong through 2023.

During the quarter, Trane paid $155 million in dividends and currently pays about 18% of its earnings in dividends. The company therefore has ample scope to comfortably increase its dividend.

passive income producer

Trane’s earnings report also reiterated its commitment to pay a competitive dividend and to grow its dividend at or above its earnings growth rate over time. Investors looking to create a growing stream of passive income will be pleased to hear that Trane has raised the lower end of its earnings per share guidance for 2022. The company previously forecast earnings per share between $6.95 and $7. $15, and now expects between $7.05 and $7.15.

Earnings at its projected level will easily cover its $2.68 annual dividend, which has grown more than 10% annually for the past five years. The stock is currently yielding 1.7%, and given the company’s growth forecast, passive investors should have their eyes firmly set on Trane.

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BJ Cook has no position in the stocks mentioned. The Motley Fool has no position in the stocks mentioned. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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