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Dividend Aristocrats In Focus: Illinois Tool Works Inc.


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    Updated on February 6th, 2025 by Felix Martinez

    At Sure Dividend, we often talk about the merits of the Dividend Aristocrats. We believe this exclusive group of stocks broadly has strong brands, consistent profits even during recessions, and durable competitive advantages.

    These qualities allow the Dividend Aristocrats to raise their dividends every year, regardless of the state of the economy.

    Of the stocks comprising the S&P 500 Index, just 69 qualify as Dividend Aristocrats. You can download a copy of the full list of all 69 Dividend Aristocrats, complete with metrics like dividend yields and P/E ratios, by clicking on the link below:

     

    Disclaimer: Sure Dividend is not affiliated with S&P Global in any way. S&P Global owns and maintains The Dividend Aristocrats Index. The information in this article and downloadable spreadsheet is based on Sure Dividend’s own review, summary, and analysis of the S&P 500 Dividend Aristocrats ETF (NOBL) and other sources, and is meant to help individual investors better understand this ETF and the index upon which it is based. None of the information in this article or spreadsheet is official data from S&P Global. Consult S&P Global for official information.

    Each year, we individually review all the Dividend Aristocrats. The next in the series is Illinois Tool Works (ITW).

    Illinois Tool Works has a long history of dividend growth even through recessions, which is especially impressive given the cyclical nature of its business model. This article will discuss the major factors for Illinois Tool Works’ long dividend history.

    Business Overview

    Illinois Tool Works has been in business for more than 100 years. It started out all the way back in 1902. A group of inventors formed with an idea to improve gear grinding, and Illinois Tool Works was born.

    Today, Illinois Tool Works has a market capitalization of $75 billion and generates annual revenue of nearly $15.9 billion. Illinois Tool Works is composed of seven segments: Automotive, Food Equipment, Test & Measurement, Welding, Polymers & Fluids, Construction Products, and Specialty Products.

    These segments have performed well against its peers, which has allowed Illinois Tool Works to achieve “best of breed” status in its industry.

    Illinois Tool Works’ portfolio is concentrated in product segments that each hold above-average growth potential in their respective markets. The overarching strategic growth plan for Illinois Tool Works is to reshape its business model, when necessary continuously. The company frequently utilizes bolt-on acquisitions to expand its reach.

    Growth Prospects

    On February 5th, 2025, Illinois Tool Works reported a 1.3% revenue decline for both Q4 and full-year 2024, with totals of $3.9 billion and $15.9 billion, respectively. Despite this, the company achieved record operating margins of 26.2% in Q4 and 26.8% for the year, driven by enterprise initiatives. EPS grew 7% in Q4 to $2.54, while full-year GAAP EPS reached a record $11.71, up 20%. Free cash flow hit $2.8 billion, with a 94% conversion to adjusted net income, and ITW returned $3.2 billion to shareholders through dividends and buybacks.

    In Q4, organic growth declined 0.5% but turned positive at 0.4% when adjusted for Product Line Simplification (PLS). Operating cash flow reached $1.1 billion, with free cash flow up 10% to $1 billion. For the full year, six of seven segments expanded margins, with two exceeding 30%. The company’s operating margin improved by 170 basis points, with enterprise initiatives contributing 130 basis points. ITW also repurchased $375 million in shares during Q4.

    For 2025, ITW expects GAAP EPS between $10.15 and $10.55, factoring in a $0.30 foreign currency headwind. Organic growth is projected at 0% to 2%, or 1% to 3% excluding PLS impact. Operating margins are expected to improve to 26.5%–27.5%, with enterprise initiatives contributing 100 basis points. Free cash flow is forecasted to exceed net income, and the company plans to repurchase $1.5 billion in shares.

    In the future, Illinois Tool Works will grow its earnings-per-share via several drivers. First, ongoing organic business growth should add to profits overtime. On top of that, the company can grow via M&A, and efficiency and scale advantages could lead to some margin expansion as the company grows.

    Lastly, share repurchases will add to the company’s earnings-per-share as well. Overall, we expect 7% annual EPS growth over the next five years.

    Source: Investor Presentation

    Competitive Advantages & Recession Performance

    Illinois Tool Works has a significant competitive advantage. It possesses a wide economic “moat,” which refers to its ability to keep competition at bay. It does this with a massive intellectual property portfolio. Illinois Tool Works holds over 17,000 granted and pending patents.

    Separately, another competitive advantage is Illinois Tool Works’ differentiated management strategy. The company has employed a management process called “80/20”. This is an operating system that is applied to every business line at Illinois Tool Works. The company focuses on its largest and best opportunities (the “80”) and seeks to eliminate costs or divest its less profitable operations (the “20”).

    One potential downside of Illinois Tool Works’ business model is that it is vulnerable to recessions. As an industrial manufacturer, Illinois Tool Works is reliant on a healthy global economy for growth.
    Earnings-per-share performance during the Great Recession is below:

    That said, the company remained highly profitable during the Great Recession. This allowed it to continue increasing its dividend each year during the recession, even when earnings declined. The company also recovered quickly. Earnings-per-share soared 57% in 2010. By 2011, earnings-per-share surpassed 2007 levels.

    A similar pattern was seen in 2020 as the coronavirus pandemic caused an economic recession. Illinois Tool Works’ earnings-per-share declined in 2020, but the decline was manageable and the company continued to raise its dividend.

    Valuation & Expected Returns

    Using the current share price of ~$255 and the midpoint for earnings guidance of $10.35 for 2025, Illinois Tool Works trades for a price-to-earnings ratio of 24.6. Given the company’s cyclical nature, we feel that a target price-to-earnings ratio 21.5 is appropriate. This is roughly in line with the company’s 10-year historical average.

    As a result, Illinois Tool Works is currently overvalued. Returning to our target price-to-earnings ratio by 2030 would reduce annual returns by approximately 3.0% over this period of time. Aside from changes in the price-to-earnings multiple, future returns will be driven by earnings growth and dividends.

    We expect 7% annual earnings growth over the next five years. In addition, Illinois Tool Works stock has a current dividend yield of 2.4%.

    Total returns could consist of the following:

    Illinois Tool Works is expected to return around 6.4% per year through 2030. This isn’t too compelling, which is why we rate Illinois Tool Works a “hold” today, although the company’s ability to raise dividends through multiple recessions is impressive.

    The company now has 61 consecutive years of dividend growth, making ITW a Dividend Aristocrat and a Dividend King.

    Source: Investor Presentation

    Final Thoughts

    Illinois Tool Works is a high-quality company and an even better dividend growth stock. It has a strategic growth plan that is working well, and shareholders have been rewarded with rising dividends for 61 years.

    Shares are not attractive at the moment, so we do not deem Illinois Tool Works as a “buy” at current prices.

    Illinois Tool Works is a classic example of a great company, but not a stock to buy right now. Despite its status as a Dividend Aristocrat and Dividend King, we suggest investors wait for a better entry point before purchasing Illinois Tool Works shares.

    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 following Sure Dividend databases:

    The major domestic stock market indices are another solid resource for finding investment ideas. Sure Dividend compiles the following stock market databases and updates them monthly:

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