The company’s last dividend increase was in July 2012 when the Board of Directors approved an 6% increase to 38 cents/share. The company’s largest competitors include General Electric (NYSE:GE), Cooper Industries (CBE) and Manitowoc (NYSE:MTW).
Over the past decade this dividend growth stock has delivered an annualized total return of 7.40% to its shareholders.
The company has managed to an impressive increase in annual EPS growth since 2002. Earnings per share have risen by 11.70% per year. Analysts expect Illinois Tool Works to earn $4.14 per share in 2012 and $4.53 per share in 2013. In comparison Illinois Tool Works earned $4.08/share in 2011.
Over 60% of company’s revenues are derived internationally. Over time, Illinois Tool Works expects that increased sales from developing markets such as Brazil, China and India will lead to higher profitability in the long run. Other drivers behind growth include the ability of the company to innovate as well to keep focusing on the areas which derive maximum value to customers. Continued streamlining of operations should reduce waste in the system, and reduce costs. Strategic sourcing , aiming to lower costs for materials as well as the continued focus on divesting non core assets, should further drive profitability for ITW over the next decade. By focusing on consistent stock buybacks as well, Illinois Tool Works should also be able to increase EPS over time. Over the past decade, the company reduced the amount of shares outstandin from 613 million in 2002 to 483 million in 2011.
The return on equity has closely followed the rise and fall of the economy throughout various economic cycles. This indicator rose between 2002 and 2006, declined between 2007 – 2009 and has been increasing ever since 2010. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.
The annual dividend payment has increased by 12.90% per year over the past decade, which is slightlyhigher than to the growth in EPS.
A 12.90% growth in distributions translates into the dividend payment doubling every five and a half years. If we look at historical data, going as far back as 1990 we see that Illinois Tool Works has actually managed to double its dividend every five years on average.
The dividend payout ratio has remained around 30% over the past decade, with the exception of a brief spike between 2008 – 2010 due to the recession. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.
Currently, Illinois Tool Works is attractively valued at 12.80 times earnings, has an adequately covered dividend and yields 2.50%. I would consider adding to my position in the stock subject to availability of funds.
Full Disclosure: Long ITW
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