Dividend Aristocrats

Illinois Tool Works Stock, 45 Year Dividend Aristocrat

Illinois Tool Works Stock is a member of the prestigious S&P 500 Dividend Aristocrats group. These are stocks that have consistently paid and raised their dividends for at least 25 years (without missing a single year), have a minimum $3 billion market capitalization and are included in the S&P 500 index.

Management last raised its dividend by a whopping 28% from $3.56 per share in 2018 to $4.14 in 2019. Dividend growth is a powerful investing strategy and buying Illinois Tool Works Stock helps investors achieve growing dividend incomes as well as capital appreciation.

In this article, we will review business operations of Illinois Tool Works, latest financial results as of 4th Quarter, 2019, dividend growth history, long term stock performance and valuation versus the S&P 500 index.

Table of Contents

This article is broken down in to sections, feel free to jump to the area that interests you.

Business Synopsis

Founded in 1912 by a Chicago financier named Byron Smith, Illinois Tool Works started off as a gear grinding technology company. Today, it is a global diversified manufacturer of industrial products with 87 subsidiaries in 55 countries. Management conducts operations across 7 segments. They are as follows.

  1. Automotive OEM
  2. Food Equipment
  3. Test Measurement and Electronics
  4. Polymers & Fluids
  5. Construction Products
  6. Specialty Products
  7. Welding

The company operates on its proprietary ITW Business Model which is constantly evolving and has been over the past 30 years. To achieve maximum profitability and serve its largest customers, the 80-20 Front-to-Back model is a methodology the company uses.

The objective is to simplify product offerings, streamline assembly processes and carefully analyze target markets to give customers exactly what they are looking for. It also means targeting resources to serve the largest customers that make up 80% of all revenues.

Illinois Tool Works Business Model

This method allows the company to generate better gross and operating margins than most of its peers in the Industrials sector. Management is also focused on Customer-Back Innovation versus the traditional Research & Development method.

By listening directly to the complex technical needs of its customers, the company is able to design industrial technologies that serve exactly this purpose for profitable margins.

ITW has 18,000 granted and pending industrial patents including 1,700 filed in 2018. Employing 45,000 people across 55 countries, the company generates 53% of its revenues in North America, 28% in Europe, Middle & Africa and 19% in Asia Pacific.

ITW Stock Revenues by Geography

Revenue Analysis and Share Buybacks

For full year 2019, Illinois Tool Works earned$14.1 billion in revenues, down 4.7% from 2018’s $14.8 billion. Earnings per Share came in at $7.74, a 2% growth from 2018’s EPS of $7.60. This is attributable to the company’s $1.5 billion in share repurchases for the year.

Over the last decade, ITW has seen declining revenues from $15.416 billion in 2010 to $14.1 billion in 2019. The reason for the decline is management’s vision to transform its business portfolio which resulted in divestitures of businesses giving up $5 billion in annual revenues.

As an example, in August 2012, ITW sold a majority stake in its decorative surfaces unit to a private equity firm for $1.05 billion giving up $1.1 billion in annual revenues. The company used these proceeds to buy back its own shares.

Trading on the New York Stock Exchange under the ticker ITW, Illinois Tool Works sports a $59.9 billion market capitalization and pays a 2.3% dividend yield. This yield is 50 basis points higher than the S&P 500 which pays a 1.8% dividend.

Management has also taken a complex business model with 800 business units and broken them down to 87 global divisions generating $540 million in savings and driving up operating margins and consequently earnings per share.

Attached screenshot shows how the company achieved an operating margin of 25% in 2018, up from almost 16% in 2012. Its earnings per share have also grown from $3.21 in 2012 to $7.65 in 2018, representing a compounded annual growth rate (CAGR) of 15%.

2012 to 2018 Performance ITW

Growth Outlook

In its 4th Quarter, 2019 earnings results, Illinois Tool Works reported revenue of $3.5 billion for the quarter, down 2.8% year over year from 2018’s $3.6 billion. Earnings per share grew by 9% year over year, from $1.83 per share to $1.99 per share.

Strongest performance came from food equipment and test/measurement electronics segments’ each posting organic revenues of 2% and 4% respectively and solid operating margins of 27.5% and 28.1%.

Performance by Segments Illinois Tool Works Stock

Welding and Polymers & Fluids segments’ saw organic revenue declines of 4% and 2% respectively with margins declining in the welding segment.

CEO E. Scott Santi gives a summary of the company’s quarterly performance. He quotes, “For the year, in a contracting industrial demand environment including a six percent decline in global auto builds, ITW grew earnings per share five percent excluding the impact of foreign currency headwinds, higher restructuring expenses and divestiture gains.

We expanded operating margin to 24.4 percent excluding higher restructuring expenses, improved after-tax return on invested capital to 28.7 percent, increased free cash flow nine percent and returned $2.8 billion to shareholders in the form of dividends and share repurchases.

Throughout 2019, we executed very well on the things within our control and continued to make meaningful progress on our path to full-potential performance through the implementation of our ‘Finish the Job’ enterprise strategy agenda.

ITW’s proprietary and powerful business model, diversified high-quality business portfolio and dedicated team of highly skilled ITW colleagues around the world position us well to continue to deliver differentiated performance in 2020 and beyond.”

Management also gave guidance for 2020 expecting little to negative revenue growth. It also expects operating margin of about 25% and share repurchases of $2 billion.

Illinois Tool Works 2020 Guidance

Dividend Growth History

Illinois Tool Works (ITW) is a dividend aristocrat having paid and increased dividends each year for the past 45 years. This is a very strong show. From the company’s Investor Relations website, the company paid a dividend of 8 cents per share in 1990. In 2019, it paid a dividend of $4.14 per share accounting for stock split adjustment.

Therefore, over the last 30 years, ITW has grown its dividend at a compounded annual growth rate (CAGR) of 14%. Most investors would be very content with this growth rate. Attached chart shows a stead uptrend in ITW’s dividend payments in blue line.

ITW Stock Dividend Growth Chart

Below chart shows the year over year % growth in Illinois Tool Work’s dividend. Except during the technology bubble of early 2000s and great financial crisis of 2008, the company has grown its dividends in high double-digits which is financially a very strong performance.

Measuring the Dividend Payout Ratio

Lets examine the the dividend payout ratio for Illinois Tool Works. Dividend Payout Ratio measures how much of a company’s free cash flow is paid out in the form of dividends.

Free cash flow is the cash a company generates from its daily operating activities minus capital expenditures like investing in new plants or equipment.

In its annual report, ITW discloses full year 2018 free cash flow of $2.4 billion. The company paid out $1.1 billion in cash dividends. Knowing this information, what is the dividend payout ratio?

Dividend Payout Ratio = Total Dividends Paid / Free Cash Flow

Dividend Payout Ratio = $1.1 billion / $2.4 billion

Dividend Payout Ratio = 46%

A dividend payout ratio of 46% is very strong and leaves room for future dividend increases, acquisitions that will grow earnings per share, hiring salesforce to expand operations as well as share repurchases.

Long Term ITW Stock Performance

ITW Stock has grown from $6 in January 1990 to $188 as of February 2020. This represents a compounded annual growth rate (CAGR) of 12.2% which is a phenomenal track record. Attached is a monthly long term chart of Illinois Tool Works stock showing its rise from a modest $6 to $188.

During the great financial crisis of 2008, the stock had a draw down of almost 57%, in line with the S&P 500. The stock dropped from a high of $60 in August 2007 to $26 in February 2009.

Monthly Chart ITW Stock

Stock Valuation

Analysts expect Illinois Tool Works to earn $7.91  per share in 2020. Based on today’s closing price of $187.8, the stock trades at a forward price to earnings ratio of 23.7 times, which is more expensive than the broader market S&P 500.

We think buying ITW shares at current prices is not a good idea because it is overvalued. However, a 10% to 20% general market correction would present significant buying opportunity for long term investors.

Executive Summary

Here is what we like and don’t like about Illinois Tool Works Stock.

Likes

  • Strong 5 year annualized dividend growth rate of 18%.
  • Reasonable dividend yield of 2.3% which is higher than yield offered by the S&P 500 at 1.8% or XLI at 1.9%.
  • Dividend payout ratio of just 46% which leaves room for future dividend growth, smart acquisitions and share repurchases.
  • Best operating margins of 25% when compared to peers’ 16%.
  • Expected earnings per share growth between 7% to 10% annually until 2023.
  • Share repurchase program of up to $2 billion in 2020.

Dislikes

  • Stock is overvalued trading at 23.7 times 2020 earnings.
  • Flat or -2% revenue growth for 2020.
Market Capitalization $59.9 Billion
Dividend Yield 2.3%
Forward PE Ratio 23.7 times 2020 earnings
Dividend Growth (5 Year Avg.) 18%
Dividend Payout Ratio 46%
EPS Growth (5 Year Avg.) 10.6%
2019 Revenues $14.1 Billion
Gross Margin 41.7%
Net Margin 16.2%

ITW Stock Ex-Dividend Dates

Ex-Dividend Date Record Date Announce Date Pay Date Amount Frequency
12/30/2019 12/31/2019 10/28/2019 1/15/2020 1.0700 Quarterly
9/27/2019 9/30/2019 8/2/2019 10/9/2019 1.0700 Quarterly
6/27/2019 6/28/2019 5/3/2019 7/10/2019 1.0000 Quarterly
3/28/2019 3/29/2019 2/15/2019 4/10/2019 1.0000 Quarterly
Total dividends paid in 2019 4.1400
12/28/2018 12/31/2018 11/1/2018 1/10/2019 1.0000 Quarterly
9/27/2018 9/28/2018 8/3/2018 10/9/2018 1.0000 Quarterly
6/28/2018 6/29/2018 5/4/2018 7/11/2018 0.7800 Quarterly
3/28/2018 3/30/2018 2/15/2018 4/10/2018 0.7800 Quarterly
Total dividends paid in 2018 3.5600
12/28/2017 12/29/2017 10/27/2017 1/10/2018 0.7800 Quarterly
9/28/2017 9/29/2017 8/4/2017 10/10/2017 0.7800 Quarterly
6/28/2017 6/30/2017 5/5/2017 7/12/2017 0.6500 Quarterly
3/29/2017 3/31/2017 2/10/2017 4/11/2017 0.6500 Quarterly
Total dividends paid in 2017 2.8600

Illinois Tool Works Stock Price

The most recent price for ITW Stock can be found by going to the company’s Investor Relations page and clicking on “Stock Information.”

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