Dividend Kings In Focus: Illinois Tool Works

Revealed on Could third, 2022 by Bob Ciura

The Dividend Kings are a gaggle of simply 44 shares which have elevated their dividends for not less than 50 years in a row. We consider the Dividend Kings are among the many highest-quality dividend development shares to purchase and maintain for the long run.

With this in thoughts, we created a full checklist of all 44 Dividend Kings. You possibly can obtain the total checklist, together with necessary monetary metrics corresponding to dividend yields and price-to-earnings ratios, by clicking on the hyperlink under:

Annually, we individually overview all of the Dividend Kings. The following within the sequence is Illinois Instrument Works (ITW).

Illinois Instrument Works has elevated its dividend for 50 consecutive years, which is very spectacular because it operates in a extremely cyclical sector. This text will talk about the main 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 way in which again in 1902 when a financier named Byron Smith positioned an advert within the Economist. On the time, Smith was seeking to spend money on a “high-class enterprise (manufacturing most popular) in or close to Chicago.” A gaggle of inventors approached Smith with an concept to enhance gear grinding, and Illinois Instrument Works was born.

As we speak, Illinois Instrument Works has a market capitalization of $68 billion and generates annual income of almost $15 billion. Illinois Instrument Works consists of seven segments: Automotive, Meals Tools, Check & Measurement, Welding, Polymers & Fluids, Building Merchandise, and Specialty Merchandise.

These segments have carried out very nicely towards its friends, and has allowed Illinois Instrument Works to realize “better of breed” standing in its trade.

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

Progress Prospects

Whereas 2020 was a really tough 12 months for the worldwide financial system, as a result of coronavirus pandemic which weighed closely on financial development, Illinois Instrument Works continued to generate regular income. In 2021, the corporate continued to develop its earnings and the inventory worth continued to run increased with a complete 12 months return of 23.4% for your entire 12 months of 2021.

On Could third 2022, the corporate reported first-quarter monetary outcomes. Complete income of $3.9 billion rose 11.2% year-over-year. Natural development was 10.6% for the quarter. GAAP EPS was $2.11 for the quarter.

Supply: Investor Presentation

Six of the corporate’s seven segments confirmed constructive natural development for the quarter. Meals Tools and Building Merchandise grew 28% and 21% respectively, adopted by Welding and Polymers & Fluids at 13% development every.

Check & Measurement and Electronics grew 8%, and Specialty Merchandise was up 1%. Natural income was down 1% within the Automotive OEM phase as a consequence of provide shortages inflicting manufacturing constraints.

Together with quarterly outcomes, the corporate raised full-year EPS steering.

Supply: Investor Presentation

Illinois Instrument Works expects full-year natural development of seven% to 10% and full-year income development of 8.5% to 11.5%. Earnings-per-share at the moment are anticipated in a variety of $9.00 to $9.40 (in contrast with earlier steering of $8.90 to $9.30). EPS is anticipated to develop 11% to 16% from 2021.

General, we anticipate 7% annual EPS development over the subsequent 5 years, comprised primarily of income development and share buybacks.

Aggressive Benefits & Recession Efficiency

Illinois Instrument Works has a big aggressive benefit. It possesses a large financial “moat”, which refers to its skill to maintain competitors at bay. It does this with an enormous 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 greatest alternatives (the “80”) and seeks to remove prices or divest its much less worthwhile operations (the “20”).

On the similar time, Illinois Instrument Works has a decentralized, entrepreneurial company tradition. This additionally units the corporate aside from the competitors. Illinois Instrument Works empowers its varied companies with vital flexibility, to customise their very own approaches to serving clients in the easiest way attainable.

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 world financial system for development.

Earnings-per-share efficiency through 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% enhance)

That stated, the corporate remained extremely worthwhile through the Nice Recession. This allowed it to proceed rising its dividend every year through the recession, even when earnings declined. And, because of its sturdy model portfolio, the corporate recovered rapidly. Earnings-per-share soared 57% in 2010. By 2011, earnings-per-share surpassed 2007 ranges.

An identical sample was seen in 2020 because the coronavirus pandemic prompted 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 worth of ~$204 and the midpoint for earnings steering of $9.20 for the 12 months, Illinois Instrument Works trades for a price-to-earnings ratio of twenty-two.2. Given the corporate’s cyclical nature, we really feel {that a} goal price-to-earnings ratio of 19 is suitable. That is roughly consistent with the corporate’s 10-year historic common.

In consequence, Illinois Instrument Works is at present overvalued. Returning to our goal price-to-earnings ratio by 2027 would cut back annual returns by 3.1% over this time period. Other than modifications within the price-to-earnings a number of, future returns might be pushed by earnings development and dividends.

We anticipate 7% annual earnings development over the subsequent 5 years. As well as, Illinois Instrument Works inventory has a present dividend yield of two.4%.

Complete returns might encompass the next:

• 7% earnings development
• -3.1% a number of reversion
• 2.4% dividend yield

Illinois Instrument Works is anticipated to return 6.3% per 12 months by 2027. In consequence, we now have a maintain suggestion on Illinois Instrument Works, although the corporate’s skill to lift dividends by a number of recessions is spectacular.

The corporate now has 50 consecutive years of dividend development after rising its dividend by 7% in August 2021.

Remaining Ideas

Illinois Instrument Works is a high-quality firm and a good higher dividend development inventory. It has a strategic development plan that’s working nicely, and shareholders have been rewarded with rising dividends for 50 years.

The inventory additionally has an honest 2.4% dividend yield, which might make it an interesting selection for long-term dividend development buyers. Shares should not attractively priced in the intervening time, and it’s possible the corporate will battle if and when a recession happens.

Regardless of its standing as a Dividend King, we propose buyers look ahead to a greater entry level prior earlier than buying shares of Illinois Instrument Works.

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

Should you’re in search of shares with distinctive dividend traits, think about the next Certain Dividend databases: