Updated on October 30th, 2024 by Felix Martinez
The Dividend Kings are a group of just 53 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 53 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:
We individually review all the Dividend Kings each year. The next in the series is Illinois Tool Works (ITW).
Illinois Tool Works has increased its dividend for 60 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 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 generates an annual revenue of nearly $16 billion. It is composed of seven segments: automotive, food equipment, test and measurement, welding, polymers and fluids, construction products, and specialty products.
These segments have performed well against their peers, allowing Illinois Tool Works to achieve industry-leading margins.
Illinois Tool Works’ portfolio is concentrated in product segments that hold above-average growth potential in their respective markets. The company’s overarching strategic growth plan is to continuously reshape its business model when necessary. The company frequently utilizes bolt-on acquisitions to expand its reach.
Growth Prospects
Inflation and rising interest rates challenge the macro-environment for global industrial manufacturers. However, Illinois Tool Works continues to generate steady growth in 2023.
The company reported third-quarter 2024 revenues of $4.0 billion, down 2% due to a 1% decline in organic growth, partly offset by favorable contributions from acquisitions. ITW achieved an operating margin of 26.5%, with enterprise initiatives contributing 130 basis points to this performance. The company’s GAAP earnings per share (EPS) rose to $3.91, boosted by a $1.26 per share gain from the divestiture of its equity interest in Wilsonart International Holdings LLC. Excluding this gain, adjusted EPS increased by 4% to $2.65.
ITW’s operational execution has helped mitigate macroeconomic challenges, with the company reporting operating income of $1.05 billion and cash flows indicating strong financial health. Free cash flow reached $783 million with a net income conversion rate of 102%. ITW repurchased $375 million in shares throughout the quarter and increased its dividend by 7%, reflecting the company’s confidence in its long-term growth trajectory. The effective tax rate for the quarter was 14.9%, assisted by a tax benefit linked to the Wilsonart divestiture.
For the remainder of 2024, ITW anticipates a slight decline in organic growth but has raised its full-year GAAP EPS guidance to $11.63-$11.73, up from prior estimates. The company projects an operating margin range of 26.5-27%, driven by ongoing enterprise initiatives expected to add over 100 basis points. ITW plans to sustain shareholder value through further share repurchases totaling $1.5 billion and forecasts free cash flow equal to adjusted net income for the year.
Source: Investor Presentation
Competitive Advantages & Recession Performance
Illinois Tool Works has a significant competitive advantage. Its wide economic “moat” refers to its ability to keep competition at bay. It does this with a massive intellectual property portfolio, which includes 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:
- 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% increase)
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 ~$263 and the midpoint for 2024 earnings guidance of $10.35 for the year, Illinois Tool Works trades for a price-to-earnings ratio of 25.4. Given the company’s cyclical nature, we feel a target price-to-earnings ratio of 20.5 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 multiples contracts from 25.4 to 20.5 over the next five years, it would reduce annual returns by 5% over this period.
Earnings growth and dividends will also drive future returns. We expect 7% annual earnings growth over the next five years. In addition, Illinois Tool Works stock has a current dividend yield of 2.3%.
The company has increased its dividend rapidly in the past decade.
Source: Investor Presentation
Putting it all together, Illinois Tool Works is expected to return 4.3% annually through 2029. 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 with an even better dividend growth stock. Its strategic growth plan is working well, and shareholders have been rewarded with rising dividends for over 50 years.
The stock also has a decent 2.3% 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:
- The Blue Chip Stocks List: stocks that qualify as Dividend Achievers, Dividend Aristocrats, and/or Dividend Kings
- The High Dividend Stocks List: stocks that appeal to investors interested in the highest yields of 5% or more.
- The Monthly Dividend Stocks List: stocks that pay dividends every month, for 12 dividend payments per year.