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Dividend Kings In Focus: Illinois Tool Works

Updated on October 3rd, 2023 by Bob Ciura

The Dividend Kings are a group of just 50 stocks that have increased their dividends for at least 50 years in a row. We believe the Dividend Kings are among the highest-quality dividend growth stocks to buy and hold for the long term.

With this in mind, we created a full list of all 50 Dividend Kings. You can download the full list, along with important financial metrics such as dividend yields and price-to-earnings ratios, by clicking on the link below:


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

Illinois Tool Works has increased its dividend for 59 consecutive years, which is especially impressive since it operates in a highly cyclical sector (industrials). This article will discuss the major reasons for Illinois Tool Works’ long dividend history.

Business Overview

Illinois Tool Works has been in business for more than 100 years. It started all the way back in 1902 when a financier named Byron Smith placed an ad in the Economist. At the time, Smith was looking to invest in a “high-class business (manufacturing preferred) in or near Chicago.” A group of inventors approached Smith with an idea to improve gear grinding, and Illinois Tool Works was born.

Illinois Tool Works currently 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.

Source: Investor Presentation

These segments have performed very well against their peers and allowed Illinois Tool Works to achieve industry-leading margins.

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

The macro-environment for global industrial manufacturers is challenged by inflation and rising interest rates. However, Illinois Tool Works continues to generate steady growth in 2023.

In the 2023 second quarter, revenue came in at $4.1 billion, up 2% year-over-year. Sales were up 16.2% in the Automotive OEM segment, the largest out of the company’s seven segments. Food Equipment, Welding, and Test & Measurement and Electronics segments grew revenue by 6.3%, 0.7% and 0.7%, respectively. Meanwhile, Polymers & Fluids, Construction Products, and Specialty Products saw revenue decline by 7.6%, 6.8% and 5.4%.

Earnings-per-share of $2.48 represented 4.6% year-over-year growth. Illinois Tool Works also raised its 2023 guidance and sees full-year GAAP EPS in a range of $9.55 to $9.95 (up from $9.45 to $9.85 previously).

Lastly, share buybacks will be a component of EPS growth. The company expects to repurchase roughly $1.5 billion of its own shares this year. Overall, we expect 8% annual EPS growth over the next five years, comprised mainly of revenue growth and share buybacks.

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 more than 17,000 granted and pending patents.

At the same time, Illinois Tool Works has a decentralized, entrepreneurial corporate culture. This also sets the company apart from the competition. Illinois Tool Works empowers its various businesses with significant flexibility to customize their own approaches to serving customers in the best way possible.

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 ~$230 and the midpoint for 2023 earnings guidance of $9.75 for the year, Illinois Tool Works trades for a price-to-earnings ratio of 23.6. Given the company’s cyclical nature, we feel that a target price-to-earnings ratio of 19-20 is appropriate. This is roughly in line with the company’s 10-year historical average.

As a result, Illinois Tool Works could be overvalued. If the P/E multiple contracts from 23.6 to 19.5 over the next five years, it would reduce annual returns by 3.7% over this period of time.

Future returns will be also 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 2.4%.

The company has increased its dividend at a high rate in the past decade.

Source: Investor Presentation

Putting it all together, Illinois Tool Works is expected to return 6.7% per year through 2028. As a result, we have a hold recommendation on Illinois Tool Works, though the company’s ability to raise dividends through multiple recessions is impressive.

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 over 50 years.

The stock also has a decent 2.4% dividend yield, which could make it an appealing choice for long-term dividend growth investors. But the overvaluation of the stock at the current price means total returns are not high enough for a buy recommendation from Sure Dividend.

The following articles contain lists of high yield stocks and stocks with long histories of dividends:

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