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Dividend Aristocrats In Focus: Illinois Tool Works Inc.

Updated on March 22nd, 2024 by Bob Ciura

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 ~505 stocks comprising the S&P 500 Index, just 68 qualify as Dividend Aristocrats. You can download a copy of the full list of all 68 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 $81 billion and generates annual revenue of nearly $16 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 continuously reshape its business model, when necessary. The company frequently utilizes bolt-on acquisitions to expand its reach.

Growth Prospects

While 2020 was a very difficult year for the global economy, due to the coronavirus pandemic, Illinois Tool Works has recovered strongly in the years since. On February 1st, 2024, Illinois Tool Works reported fourth quarter 2023 results for the period ending December 31st, 2023. For the quarter, revenue came in at $4.0 billion, up 0.3% year-over-year. Sales were up 9.0% in the Automotive OEM segment, the largest out of the company’s seven segments. The Food Equipment segment also grew revenue by 4%.

Meanwhile, Test & Measurement and Electronics had flat revenue growth, and Specialty Products, Polymers & Fluids, Welding, and Construction Products saw revenue decline -5%, -3%, -6%, -5%. Net income equaled $717 million or $2.38 per share compared to $907 million or $2.95 per share in Q4 2022. For the full year, Illinois Tool Works produced EPS of $9.74, just three cents short of $9.77 in 2022.

Illinois Tool Works initiated 2024 guidance and expects full-year GAAP EPS to be $10.00 to $10.40, which would equate to a 5% annual increase.

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 8% annual EPS growth over the next five years.

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 ~$269 and the midpoint for earnings guidance of $10.20 for 2024, Illinois Tool Works trades for a price-to-earnings ratio of 26.4. Given the company’s cyclical nature, we feel that a target price-to-earnings ratio 20 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 2029 would reduce annual returns by approximately 5.4% 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 8% annual earnings growth over the next five years. In addition, Illinois Tool Works stock has a current dividend yield of 2.3%.

Total returns could consist of the following:

Illinois Tool Works is expected to return around 4.7% per year through 2029. 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 60 consecutive years of dividend growth, making ITW a Dividend Aristocrat and a Dividend King.

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 60 years.

Shares are not attractively priced at the moment, which is why 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 prior before purchasing shares of Illinois Tool Works.

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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