Just a few weeks ago, on Aug. 31, Honeywell International Inc. HON joined the ranks of the Dow Jones Industrial Average DJI, the index that is supposed to reflect the broader market of all stocks traded in the United States.
It's a prestigious move, but one that doesn't necessarily mean much to the share price. As we see in this three-month price chart, the stock got an immediate boost after Aug. 31 (marked by the red line) and then promptly got back to normal:
Honeywell describes itself in its 10-K for 2019 as a diversified technology and manufacturing company that "invents and commercializes technologies that address some of the world's most critical challenges around energy, safety, security, air travel, productivity and global urbanization."
Further, it states it is committed to becoming one of the world's top software-industrial companies. To that end, it has undergone some transitional events. Since 2016 it has spun off three companies that are no longer considered a fit with the company's new direction.
It also has been investing in new growth. As management noted in the 10-K, "In 2019 we deployed capital of $7.8 billion, including capital expenditures, dividends, share repurchases, mergers and acquisitions, and venture investments."
The firm operates through four divisions:
- Aerospace
- Honeywell Building Technologies
- Performance Materials and Technologies
- Safety and Productivity Solutions
Using its innovative strengths, including $1.5 billion spent on research and development last year, it is developing new products that address Covid-19 problems, as well as the Internet of Things and other issues of the day.
Turning to the fundamentals, Honeywell receives a 6 out of 10 rating for financial strength:
Its rating is dragged down by debt, but the interest coverage ratio is 17.59, meaning it generates enough operating income to pay its current interest expenses more than 17times over.
Both the Piotroski F-Score and the Altman Z-Score are strong, indicating that there are no concern of bankruptcy.
The return on invested capital is twice as much as the weighted average cost of capital, so it is producing a positive return on money spent.
Profitability is very good with a rating of 8 out of 10:
Honeywell's strong margins, compared with both its own history and the Industrial Products industry, allow it to turn out a very profitable level of return on equity. The return on assets is also respectable.
A mixed message comes out of the three growth lines at the bottom of the chart. Revenue has been down in the past three years, but that may be a result of spinning off at least two of the three companies that were considered expendable.
At the same time, the Ebitda growth rate over the past three years and the double-digit growth in earnings per share without non-recurring items suggests the company is becoming more efficient in using its revenue to produce profits and value for shareholders.
"Modestly Overvalued" is the verdict on the stock price from the GuruFocus Value calculator. As the chart shows, the share price is still a touch below its previous high:
The price-earnings ratio, at 19.53, is roughly a point above its one-year median and is in the middle of the industry pack.
The PEG ratio is quite high at 2.91. The average five-year Ebitda growth rate of 6.7% is well below the price-earnings ratio.
With an business predictability rating of 3 out of 5 stars, we can add the discounted cash flow (DCF) calculator to our valuations toolbox. According to the assumptions shown below, the DCF calculator also suggests a modest overvaluation:
The dividend yield also might be called modest, but it is higher than the S&P 500 average. The following chart shows how the dividend payment has grown over the past decade:
Honeywell has room to grow the dividend further since the dividend payout ratio is a relatively low 43%. Notable on this table is the strength of the dividend growth rate at an average of more than 11% per year over the past three years. That combined with the current yield provides a five-year yield-on-cost of 4.11%, which is quite attractive.
The average share buyback ratio of 2.2 tells us the company has been buying back shares. We can see that in counts of the shares outstanding. Specifically, the share count is down 8.4% since maxing out in December 2013.
Gurus
Honeywell enjoys the support of 17 gurus, some of whom were enthusiastic in the fourth quarter of last year, sold in the first quarter of this year, and then bought again in the second quarter:
Two of the three gurus with the largest holdings added significantly to their positions in the second quarter. Mairs and Power (Trades, Portfolio) had the biggest holding at the end of Q2 after reducing its stake by 0.13% to 1,203,638 shares, good for a 0.17% stake in Honeywell.
Pioneer Investments (Trades, Portfolio) added 33.67% to finish the quarter with 1,176,802 shares while Diamond Hill Capital (Trades, Portfolio) added 29.7% to its stake and ended up with 1,140,977 shares.
Conclusion
Honeywell International seems a good fit for the Dow Jones Industrial Average, not only because it is in the Industrial Products industry but also because it is a big company with exposure to four sectors that reflect the larger national economic situation.
Investors, too, will find much to like—and a few things to dislike—in the company's fundamentals. Its financial strength is reasonably strong and its profitability is high. Offsetting those two pluses is the high valuation.
Because of that valuation and the debt load, value investors may want to look at other stocks instead. Growth investors may see an opportunity to pick up future capital gains here, while income investors may want a higher yield.
Disclosure: I do not own shares in any of the companies named in this article.
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