Updated Jan 26, 2023 by Jonathan Weber
At Suredividend, we often talk about the benefits of being a Dividend Nobility. We believe this exclusive group of stocks has strong brands, consistent earnings even during downturns, and enduring competitive advantages across the board. These qualities allow Dividend Aristocrats to raise their dividend every year, regardless of the state of the economy.
Of the 500 stocks that make up the S&P 500 Index, only 68 are Dividend Aristocrats. You can download a copy of the complete list of all 68 Dividend Aristocrats with metrics such as dividend yield and her P/E ratio by clicking the link below.
We review all Dividend Aristocrats individually each year. Next in the series is Illinois Tool Works (ITW). Illinois Tool Works has a long history of increasing its dividend even during recessions, which is especially impressive given the cyclical nature of its business model. In this article, we will discuss the main factors behind Illinois Tool Works’ long payout history.
Business overview
Illinois Tool Works has been in business for over 100 years. Its beginnings date back to 1902. An inventor group was formed with an idea to improve gear grinding, and Illinois Tool Works was born.
Today, Illinois Tool Works has a market capitalization of $70 billion and annual sales of nearly $16 billion. Illinois Tool Works consists of seven segments: Automotive, Food Equipment, Test and Measurement, Welding, Polymers and Fluids, Construction Products, and Specialty Products.
These segments perform well relative to their peers, enabling Illinois Tool Works to earn a “best of breed” position in the industry.
The Illinois Tool Works portfolio is focused on product segments with above-average growth potential in their respective markets. Illinois Tool Works’ overarching strategic growth plan is to continually reinvent its business model as needed. The company frequently uses bolt-on acquisitions to expand its reach.
growth outlook
2020 was a very difficult year for the global economy, but with the coronavirus pandemic weighing on economic growth, Illinois Tool Works continued to generate solid profits. In 2021, the company continued to grow its revenue, and 2022 was even better. Final results for the fourth quarter have not yet been released, but based on the results Illinois Toolworks produced in his first three quarters of the year, 2022 was the strongest year in the company’s history. Most likely.
On October 25, 2022, Illinois Tool Works reported results for the third quarter and first nine months of the period ending September 30, 2022. quarter of the year. Strong results in Automotive, Polymers & Fluids, and Construction Products were offset by declines in Food Equipment, Test & Measurement, Welding, and Specialty Products.
Source: ITW Presentation
Net income for the third quarter was $2.35 per share, compared to $2.02 per share for the year-ago quarter, representing a staggering 16% increase year-over-year.
Annual revenues for Illinois Tool Works reached $15.8 billion to $16 billion, up 9% to 10% year over year. Organic growth is expected to be 11% to 12%, but currency rate volatility is a headwind for Illinois Tool Works due to the strength of the US dollar. Illinois Tool Works also led earnings per share in the range of $9.45 to $9.55. This represents an attractive growth rate of 11% to 12% compared to the company’s earnings in fiscal year 2021.
Management expects all of the company’s segments to show strong to attractive organic growth in 2022.
Source: ITW Presentation
This points to a favorable business environment across the company in 2022, which can be explained by the continued recovery from the COVID-induced economic slowdown.
In the future, Illinois Tool Works expects to increase its earnings per share by several factors. First, continued organic business growth should add to overtime earnings. Besides, the company can grow through his M&A, and the efficiencies and scale advantages could lead to some increase in profit margins as the company grows. Last but not least, the buyback will also add to his earnings per share for the company. Overall, we expect 7% annual EPS growth over the next five years.
Competitive Advantage and Recession Performance
Illinois Tool Works has a significant competitive advantage. It has a wide economic “moat” which means it has the ability to keep the competition at bay. We do this with a large intellectual property portfolio. Illinois Tool Works holds over 17,000 issued and pending patents.
Apart from this, another competitive advantage is Illinois Tool Works’ differentiated management strategy. The company employs a management process called “80/20”. This is the operating system that applies to all Illinois Tool Works lines of business. The company is looking to focus on the biggest and best opportunities (“80”), cut costs or divest less profitable businesses (“20”).
At the same time, Illinois Tool Works has a decentralized and entrepreneurial corporate culture. This also makes the company stand out from its competitors. Illinois Tool Works gives various businesses great flexibility to customize their own approach to serving their customers in the best possible way.
One potential drawback of the Illinois Tool Works business model is its susceptibility to economic downturns. As an industrial manufacturer, Illinois Tool Works’ growth depends on a healthy global economy.
Earnings per share performance during the Great Recession:
- Earnings per share of $3.36 in 2007
- 2008 earnings per share of $3.05 (down 9%)
- Earnings per share of $1.93 in 2009 (down 37%)
- 2010 earnings per share of $3.03, up 57%
That said, the company remained highly profitable during the Great Recession. This allowed us to keep increasing our dividend each year during the recession, even when our earnings declined. And thanks to its strong brand portfolio, the company recovered quickly. Earnings per share he soared 57% in 2010. By 2011, earnings per share exceeded his 2007 level.
We saw a similar pattern in 2020, with the COVID-19 pandemic triggering a recession. Illinois Tool Works’ earnings per share declined in his 2020, but the decline was manageable and the company continued to increase its dividend. Meanwhile, earnings per share he rebounded quickly in 2021, hitting a record high that year.
Valuation and Expected Return
With a current stock price of about $230 and using the midpoint earnings guidance of $9.45 for the year, Illinois Toolworks’ price/earnings ratio is 24.3. Given the company’s cyclical nature, we believe a price/earnings ratio target of 19/20 is appropriate. This is roughly in line with the company’s average over the last ten years.
As a result, Illinois Tool Works is currently overrated. A return to the target price/earnings ratio by 2028 would reduce annual earnings by about 4% over this period. Aside from changes in the price/earnings ratio, future returns are driven by earnings growth and dividends.
We expect annual profit growth of 7% over the next five years. Plus, Illinois Toolworks’ current dividend yield is he’s 2.3%.
A total return consists of:
- 7% increase in revenue
- -4% Return multiple times
- 2.3% dividend yield
Illinois Tool Works is expected to return approximately 5% annually through 2028. This is not very attractive. So while I currently rate Illinois Tool Works as a “Hold,” the company’s ability to raise dividends through multiple downturns is impressive. The company has increased its dividend for 58 consecutive years after raising it again in 2022.
final thoughts
Illinois Tool Works is a quality company and an even better dividend growth stock. The company has a strategic growth plan that has worked well, and shareholders have been rewarded with increased dividends over his 58 years.
Today’s stock has a dividend yield of 2.3%, which isn’t spectacular. We do not consider Illinois Tool Works a “buy” at its current price as the stock is not currently attractively priced.
Illinois Tool Works is a classic example of a great company, but it’s not the stock to buy right now. Despite being a dividend aristocrat and king, investors are advised to wait for a better entry point before buying Illinois Tool Works stock.
Additionally, the following Sure Dividend databases contain the most reliable dividend growers in our investment universe.
If you’re looking for stocks with unique dividend characteristics, consider the Sure Dividend database below.
Major domestic stock market indices are another solid resource for finding investment ideas. Sure Dividend compiles and updates the following stock market databases monthly.
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