Is Eaton Stock a Buy Now?

I bought Eaton (NYSE: ETN) in 2015. Over the roughly 10 years that I've owned it, the stock has risen by 530%. Over that same span of time, the S&P 500 index has risen just shy of 240%. After such a large advance, however, would I buy this electrical-focused industrial giant again now?

A big win for me: Thank you, Mr. Buffett

Not to toot my own horn or anything, but Eaton was a big win. The truth is, I got really lucky with my investment in Eaton. Trust me, not all of my investments work out that well. However, I can place some of the win here at the feet of Warren Buffett, the so-called Oracle of Omaha. His investment approach has been instrumental in my thinking.

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From a big-picture perspective, Warren Buffett's investment approach is simple. Buy well-run companies when they are attractively priced and then hold for the long term to benefit from the growth of those businesses over time. Buffett has his own way of picking stocks, but the broad framework can be used with just about any investing overlay. My overlay is dividend investing.

That's how I found Eaton, which had a historically high dividend yield at the time I bought it. At the time, it was still integrating a very large acquisition (Cooper Industries) and had held its dividend steady after years of annual increases. I reasoned that it was just digesting a big deal and that its growth plan was solid. Effectively, it was attempting to shift its business more toward electrical products. This move proved prescient.

The yield is part of the problem today

At this point, the company has exited a number of more cyclical business lines (like hydraulics), which has improved margins through the business cycle. And management expanded its exposure to electrical products to the point where they make up nearly 75% of the top line of the company's income statement.

In other words, Eaton is more focused, more profitable, and larger. I have definitely benefited from the business's growth over time. This growth, however, hasn't gone unnoticed on Wall Street. When I bought the stock, the price-to-earnings (P/E) ratio was around 13. Today, the P/E ratio is 32. That's in line with the stock's five-year average P/E, but way above where I bought in.

Before you take that P/E ratio and decide the stock is reasonably valued, keep in mind that valuation is more art than science. The price-to-sales and price-to-book value ratios are both above their five-year averages. However, I'm a dividend lover, so I care greatly about dividend yields. In fact, I use them as a valuation tool, preferring to buy stocks when they have historically high yields.

With a 1.3% dividend yield, Eaton's yield is just a fraction of what it was when I bought the stock. And that's true despite regular dividend increases over my roughly decade-long holding period. Using dividend yield as a rough gauge of valuation, Eaton looks expensive. Given that the P/E ratio only suggests a fair valuation and every other traditional valuation metric, plus the dividend yield, suggests it is expensive, I don't think Eaton is worth buying today.

I'm not selling anytime soon

A growth investor might take a different view from me, considering I have a clear value bias. However, even for a growth investor, the valuation appears somewhat stretched at present. Eaton has a habit of going through deep drawdowns.

In fact, the stock is in the middle of one right now, with shares down over 15% from their recent highs. A decline of 30% to 40%, which is not out of line with historical pullbacks, would make the stock a lot more interesting.

Reuben Gregg Brewer has positions in Eaton Plc. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.