Dividend Aristocrats In Focus: Illinois Tool Works Inc.

Up to date on March twenty second, 2024 by Bob Ciura

At Positive Dividend, we regularly discuss in regards to the deserves of the Dividend Aristocrats. We imagine this unique group of shares broadly has robust manufacturers, constant income even throughout recessions, and sturdy aggressive benefits.

These qualities enable the Dividend Aristocrats to lift their dividends yearly, whatever the state of the financial system.

Of the ~505 shares comprising the S&P 500 Index, simply 68 qualify as Dividend Aristocrats. You’ll be able to obtain a duplicate of the complete record of all 68 Dividend Aristocrats, full with metrics like dividend yields and P/E ratios, by clicking on the hyperlink under:

Disclaimer: Positive Dividend just isn’t affiliated with S&P International in any method. S&P International owns and maintains The Dividend Aristocrats Index. The knowledge on this article and downloadable spreadsheet is predicated on Positive Dividend’s personal evaluation, abstract, and evaluation of the S&P 500 Dividend Aristocrats ETF (NOBL) and different sources, and is supposed to assist particular person buyers higher perceive this ETF and the index upon which it’s based mostly. Not one of the data on this article or spreadsheet is official information from S&P International. Seek the advice of S&P International for official data.

Every year, we individually evaluation all of the Dividend Aristocrats. The subsequent within the sequence is Illinois Instrument Works (ITW).

Illinois Instrument Works has an extended historical past of dividend progress even by way of recessions, which is particularly spectacular given the cyclical nature of its enterprise mannequin. This text will talk about the most important components for Illinois Instrument Works’ lengthy dividend historical past.

Enterprise Overview

Illinois Instrument Works has been in enterprise for greater than 100 years. It began out all the best way again in 1902. A gaggle of inventors shaped with an thought to enhance gear grinding, and Illinois Instrument Works was born.

Right this moment, Illinois Instrument Works has a market capitalization of $81 billion and generates annual income of practically $16 billion. Illinois Instrument Works consists of seven segments: Automotive, Meals Gear, Check & Measurement, Welding, Polymers & Fluids, Development Merchandise, and Specialty Merchandise.

These segments have carried out effectively towards its friends, which has allowed Illinois Instrument Works to realize “better of breed” standing in its business.

Illinois Instrument Works’ portfolio is concentrated in product segments that every maintain above-average progress potential of their respective markets. The overarching strategic progress plan for Illinois Instrument Works is to constantly reshape its enterprise mannequin, when mandatory. The corporate incessantly makes use of bolt-on acquisitions to develop its attain.

Development Prospects

Whereas 2020 was a really troublesome 12 months for the worldwide financial system, because of the coronavirus pandemic, Illinois Instrument Works has recovered strongly within the years since. On February 1st, 2024, Illinois Instrument Works reported fourth quarter 2023 outcomes for the interval ending December thirty first, 2023. For the quarter, income got here in at $4.0 billion, up 0.3% year-over-year. Gross sales have been up 9.0% within the Automotive OEM section, the biggest out of the corporate’s seven segments. The Meals Gear section additionally grew income by 4%.

In the meantime, Check & Measurement and Electronics had flat income progress, and Specialty Merchandise, Polymers & Fluids, Welding, and Development Merchandise noticed income decline -5%, -3%, -6%, -5%. Internet revenue equaled $717 million or $2.38 per share in comparison with $907 million or $2.95 per share in This autumn 2022. For the complete 12 months, Illinois Instrument Works produced EPS of $9.74, simply three cents wanting $9.77 in 2022.

Illinois Instrument Works initiated 2024 steerage and expects full-year GAAP EPS to be $10.00 to $10.40, which might equate to a 5% annual improve.

Sooner or later, Illinois Instrument Works will develop its earnings-per-share through a number of drivers. First, ongoing natural enterprise progress ought to add to income extra time. On high of that, the corporate can develop through M&A, and effectivity and scale benefits might result in some margin enlargement as the corporate grows.

Lastly, share repurchases will add to the corporate’s earnings-per-share as effectively. Total, we count on 8% annual EPS progress over the subsequent 5 years.

Aggressive Benefits & Recession Efficiency

Illinois Instrument Works has a big aggressive benefit. It possesses a large financial “moat”, which refers to its potential to maintain competitors at bay. It does this with a large mental property portfolio. Illinois Instrument Works holds over 17,000 granted and pending patents.

Individually, one other aggressive benefit is Illinois Instrument Works’ differentiated administration technique. The corporate has employed a administration course of referred to as “80/20”. That is an working system that’s utilized to each enterprise line at Illinois Instrument Works. The corporate focuses on its largest and finest alternatives (the “80”) and seeks to remove prices or divest its much less worthwhile operations (the “20”).

One potential draw back of Illinois Instrument Works’ enterprise mannequin is that it’s susceptible to recessions. As an industrial producer, Illinois Instrument Works is reliant on a wholesome international financial system for progress.Earnings-per-share efficiency in the course of the Nice Recession is under:

2007 earnings-per-share of $3.36
2008 earnings-per-share of $3.05 (9% decline)
2009 earnings-per-share of $1.93 (37% decline)
2010 earnings-per-share of $3.03 (57% improve)

That stated, the corporate remained extremely worthwhile in the course of the Nice Recession. This allowed it to proceed rising its dividend annually in the course of the recession, even when earnings declined. The corporate additionally recovered rapidly. Earnings-per-share soared 57% in 2010. By 2011, earnings-per-share surpassed 2007 ranges.

An analogous sample was seen in 2020 because the coronavirus pandemic brought about an financial recession. Illinois Instrument Works’ earnings-per-share declined in 2020, however the decline was manageable and the corporate continued to lift its dividend.

Valuation & Anticipated Returns

Utilizing the present share value of ~$269 and the midpoint for earnings steerage of $10.20 for 2024, Illinois Instrument Works trades for a price-to-earnings ratio of 26.4. Given the corporate’s cyclical nature, we really feel {that a} goal price-to-earnings ratio 20 is suitable. That is roughly consistent with the corporate’s 10-year historic common.

In consequence, Illinois Instrument Works is presently overvalued. Returning to our goal price-to-earnings ratio by 2029 would cut back annual returns by roughly 5.4% over this time period. Except for adjustments within the price-to-earnings a number of, future returns will likely be pushed by earnings progress and dividends.

We count on 8% annual earnings progress over the subsequent 5 years. As well as, Illinois Instrument Works inventory has a present dividend yield of two.3%.

Complete returns might include the next:

8% earnings progress
-5.4% a number of reversion
2.1% dividend yield

Illinois Instrument Works is predicted to return round 4.7% per 12 months by way of 2029. This isn’t too compelling, which is why we charge Illinois Instrument Works a “maintain” at the moment, though the corporate’s potential to lift dividends by way of a number of recessions is spectacular.

The corporate now has 60 consecutive years of dividend progress, making ITW a Dividend Aristocrat and a Dividend King.

Ultimate Ideas

Illinois Instrument Works is a high-quality firm and an excellent higher dividend progress inventory. It has a strategic progress plan that’s working effectively, and shareholders have been rewarded with rising dividends for 60 years.

Shares should not attractively priced in the intervening time, which is why we don’t deem Illinois Instrument Works as a “purchase” at present costs.

Illinois Instrument Works is a basic instance of an excellent firm, however not a inventory to purchase proper now. Regardless of its standing as a Dividend Aristocrat and Dividend King, we propose buyers await a greater entry level prior earlier than buying shares of Illinois Instrument Works.

Moreover, the next Positive Dividend databases include probably the most dependable dividend growers in our funding universe:

When you’re on the lookout for shares with distinctive dividend traits, take into account the next Positive Dividend databases:

The key home inventory market indices are one other stable useful resource for locating funding concepts. Positive Dividend compiles the next inventory market databases and updates them month-to-month: