Dividend Aristocrats In Focus: Illinois Device Works Inc.

Up to date on March twenty second, 2024 by Bob Ciura

At Certain Dividend, we frequently speak concerning the deserves of the Dividend Aristocrats. We imagine this unique group of shares broadly has sturdy manufacturers, constant earnings even throughout recessions, and sturdy aggressive benefits.

These qualities permit the Dividend Aristocrats to lift their dividends yearly, whatever the state of the financial system.

Of the ~505 shares comprising the S&P 500 Index, simply 68 qualify as Dividend Aristocrats. You’ll be able to obtain a replica of the complete record of all 68 Dividend Aristocrats, full with metrics like dividend yields and P/E ratios, by clicking on the hyperlink beneath:

Disclaimer: Certain Dividend will not be affiliated with S&P World in any manner. S&P World owns and maintains The Dividend Aristocrats Index. The knowledge on this article and downloadable spreadsheet is predicated on Certain Dividend’s personal assessment, abstract, and evaluation of the S&P 500 Dividend Aristocrats ETF (NOBL) and different sources, and is supposed to assist particular person buyers higher perceive this ETF and the index upon which it’s primarily based. Not one of the info on this article or spreadsheet is official knowledge from S&P World. Seek the advice of S&P World for official info.

Every year, we individually assessment all of the Dividend Aristocrats. The following within the sequence is Illinois Device Works (ITW).

Illinois Device Works has a protracted historical past of dividend development even by recessions, which is particularly spectacular given the cyclical nature of its enterprise mannequin. This text will talk about the key components for Illinois Device Works’ lengthy dividend historical past.

Enterprise Overview

Illinois Device Works has been in enterprise for greater than 100 years. It began out all the best way again in 1902. A bunch of inventors shaped with an thought to enhance gear grinding, and Illinois Device Works was born.

At the moment, Illinois Device Works has a market capitalization of $81 billion and generates annual income of almost $16 billion. Illinois Device Works consists of seven segments: Automotive, Meals Gear, Check & Measurement, Welding, Polymers & Fluids, Development Merchandise, and Specialty Merchandise.

These segments have carried out nicely towards its friends, which has allowed Illinois Device Works to realize “better of breed” standing in its business.

Illinois Device Works’ portfolio is concentrated in product segments that every maintain above-average development potential of their respective markets. The overarching strategic development plan for Illinois Device Works is to constantly reshape its enterprise mannequin, when needed. The corporate steadily makes use of bolt-on acquisitions to increase its attain.

Development Prospects

Whereas 2020 was a really troublesome 12 months for the worldwide financial system, as a result of coronavirus pandemic, Illinois Device Works has recovered strongly within the years since. On February 1st, 2024, Illinois Device Works reported fourth quarter 2023 outcomes for the interval ending December thirty first, 2023. For the quarter, income got here in at $4.0 billion, up 0.3% year-over-year. Gross sales have been up 9.0% within the Automotive OEM phase, the most important out of the corporate’s seven segments. The Meals Gear phase additionally grew income by 4%.

In the meantime, Check & Measurement and Electronics had flat income development, and Specialty Merchandise, Polymers & Fluids, Welding, and Development Merchandise noticed income decline -5%, -3%, -6%, -5%. Internet earnings equaled $717 million or $2.38 per share in comparison with $907 million or $2.95 per share in This autumn 2022. For the complete 12 months, Illinois Device Works produced EPS of $9.74, simply three cents wanting $9.77 in 2022.

Illinois Device Works initiated 2024 steering and expects full-year GAAP EPS to be $10.00 to $10.40, which might equate to a 5% annual improve.

Sooner or later, Illinois Device Works will develop its earnings-per-share through a number of drivers. First, ongoing natural enterprise development ought to add to earnings time beyond regulation. On high of that, the corporate can develop through M&A, and effectivity and scale benefits might result in some margin enlargement as the corporate grows.

Lastly, share repurchases will add to the corporate’s earnings-per-share as nicely. General, we count on 8% annual EPS development over the subsequent 5 years.

Aggressive Benefits & Recession Efficiency

Illinois Device Works has a major aggressive benefit. It possesses a large financial “moat”, which refers to its means to maintain competitors at bay. It does this with an enormous mental property portfolio. Illinois Device Works holds over 17,000 granted and pending patents.

Individually, one other aggressive benefit is Illinois Device Works’ differentiated administration technique. The corporate has employed a administration course of known as “80/20”. That is an working system that’s utilized to each enterprise line at Illinois Device Works. The corporate focuses on its largest and finest alternatives (the “80”) and seeks to eradicate prices or divest its much less worthwhile operations (the “20”).

One potential draw back of Illinois Device Works’ enterprise mannequin is that it’s susceptible to recessions. As an industrial producer, Illinois Device Works is reliant on a wholesome international financial system for development.Earnings-per-share efficiency throughout the Nice Recession is beneath:

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% improve)

That stated, the corporate remained extremely worthwhile throughout the Nice Recession. This allowed it to proceed rising its dividend every year throughout the recession, even when earnings declined. The corporate additionally recovered shortly. Earnings-per-share soared 57% in 2010. By 2011, earnings-per-share surpassed 2007 ranges.

The same sample was seen in 2020 because the coronavirus pandemic prompted an financial recession. Illinois Device Works’ earnings-per-share declined in 2020, however the decline was manageable and the corporate continued to lift its dividend.

Valuation & Anticipated Returns

Utilizing the present share value of ~$269 and the midpoint for earnings steering of $10.20 for 2024, Illinois Device Works trades for a price-to-earnings ratio of 26.4. Given the corporate’s cyclical nature, we really feel {that a} goal price-to-earnings ratio 20 is suitable. That is roughly according to the corporate’s 10-year historic common.

In consequence, Illinois Device Works is presently overvalued. Returning to our goal price-to-earnings ratio by 2029 would cut back annual returns by roughly 5.4% over this time period. Except for adjustments within the price-to-earnings a number of, future returns will likely be pushed by earnings development and dividends.

We count on 8% annual earnings development over the subsequent 5 years. As well as, Illinois Device Works inventory has a present dividend yield of two.3%.

Complete returns might include the next:

8% earnings development
-5.4% a number of reversion
2.1% dividend yield

Illinois Device Works is anticipated to return round 4.7% per 12 months by 2029. This isn’t too compelling, which is why we fee Illinois Device Works a “maintain” at this time, though the corporate’s means to lift dividends by a number of recessions is spectacular.

The corporate now has 60 consecutive years of dividend development, making ITW a Dividend Aristocrat and a Dividend King.

Remaining Ideas

Illinois Device Works is a high-quality firm and a fair higher dividend development inventory. It has a strategic development plan that’s working nicely, and shareholders have been rewarded with rising dividends for 60 years.

Shares aren’t attractively priced in the meanwhile, which is why we don’t deem Illinois Device Works as a “purchase” at present costs.

Illinois Device Works is a traditional instance of an excellent firm, however not a inventory to purchase proper now. Regardless of its standing as a Dividend Aristocrat and Dividend King, we recommend buyers await a greater entry level prior earlier than buying shares of Illinois Device Works.

Moreover, the next Certain Dividend databases comprise probably the most dependable dividend growers in our funding universe:

When you’re in search of shares with distinctive dividend traits, contemplate the next Certain Dividend databases:

The main home inventory market indices are one other stable useful resource for locating funding concepts. Certain Dividend compiles the next inventory market databases and updates them month-to-month: