Honeywell (HON, Financial) touched a near-term low of $105.8 on Oct. 11, 2016. Subsequently, the stock has seen upside and trades 20% higher at $126.6. Even after this upside, Honeywell is worth accumulating.
I discussed three dividend aristocrats recently, and Honeywell is yet another quality dividend stock. The company currently offers a dividend of $2.66 per share that translates into a dividend yield of 2.09%. Dividends are likely to see steady growth.
Appealing target industries
Globally, Honeywell is catering to some high-growth industries, and that is an important reason to believe the stock is likely to trend higher as growth remains robust.
For fiscal 2017, Honeywell expects 28% sales from home and buildings, 19% from commercial aerospace, 15% from oil and gas and 14% from industrials among others. As growth bottoms out in China, many of these industries are likely to witness steady demand and potentially increasing demand.
Just as an example, the company derives 50% of aerospace sales from the U.S. and 26% from Europe. Aerospace sales in China are only 5%, and there is significant potential for growth in China as well as India. I specifically wanted to mention the aerospace business because Honeywell targets long-term margin of 25% from the segment; if this is achieved, cash flows will see strong positive impact.
I also wanted to mention the commercial aerospace segment because Honeywell has won 75% of the OEM contracts in the last four years, and this underscores the potential ahead along with the company’s strong positioning in the sector.
The outlook for the oil and gas industry might be relatively uncertain but is still better than fiscal 2016. If oil can sustain above $50 per barrel, the outlook is likely to remain positive. Honeywell also has 10% expected sales from the defense sector in fiscal 2017, and the sector will deliver in the near term as well as in the long term.
Another sector that will drive growth for Honeywell is the e-commerce sector. E-commerce growth has been robust globally, not just in emerging markets, and there is strong demand for warehouse automation. This is likely to keep sales strong in this sector for Honeywell.
Inorganic growth
One of the biggest positives for Honeywell is the company’s strong cash generation capacity. As a result, the company has high financial flexibility for acquisitions that can drive inorganic growth in the future.
Just to put things into perspective, the company has non-U.S. M&A capacity of $8.0 billion for fiscal 2017 and over the period of fiscal 2017 to fiscal 2019, the company aims at acquisitions worth $12.0 billion. This will help Honeywell make inroads in emerging markets, even in sectors that seem relatively well penetrated.
Another important point to note is that if there is tax reform in the coming quarters, Honeywell is likely to increase its global acquisition target to $18 billion. Therefore, the outlook is bright in terms of inorganic growth, and this can help the stock sustain positive momentum.
Growing dividends
Honeywell has been a value creator for investors with sustained growth in dividends. From dividend payout of $1.64 in fiscal 2012, the company’s dividend swelled to $2.66 in fiscal 2016. I expect dividend growth to continue considering the points discussed above.
It is important to note that, in all segments of business, Honeywell is working on improving margins in the coming years, and cash flow growth is likely besides OCF growth through top-line growth on this factor. Therefore, the visibility for dividends is bright; for dividend investors, Honeywell is appealing.
Conclusion
Honeywell reported fiscal 2016 EPS of $6.6 and trades at 19 times fiscal 2016 EPS. Even if a conservative EPS growth of 5% is considered for fiscal 2017, the company is trading at 18 times forward earnings. I don’t see this as expensive.
Considering the company’s strong fundamentals, robust dividends and a clear growth strategy, Honeywell is attractive even at current levels and can be considered with a time horizon of three to five years.
Disclosure: No position in the stock.
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