Illinois Tool Works another Dividend Aristocrat that is currently undervalued

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Illinois Tool Works another Dividend Aristocrat that is currently undervalued

Published Date: 2018-08-30 | Source: Share Picks USA | Author: Bruce Ingram | Comments

Illinois Tool Works another Dividend Aristocrat that is currently undervalued

ITW was founded in 1912. It is one of the world's largest industrial component manufacturers, operating over 500 facilities around the globe. The company has been growing its dividends for more than 50 years. The company employs more than 500,000 people around the world. In 2017 the total revenue was $14.3 billion. ITW is globally diversified with 51% of revenue coming from North America, 28% from EMEA and 21% from Asia Pacific and other countries. The company is well represented in South Africa through its subsidiaries such as Wynns, Alpine Automation and many distributors of their products.

The company's 85 subsidiaries operate through seven business segments:

  • Automotive OEM (24% of sales, 24% of operating income)
  • Food Equipment (14% of sales, 14% of operating income)
  • Specialty Products (13% of sales, 14% of operating income)
  • Test, Measurement & Electronics (14% of sales,14% of operating income)
  • Welding (11% of sales, 13% of operating income)
  • Construction Products (11% of sales, 10% of operating income)
  • Polymers & Fluids (12% of sales, 10% of operating income)

ITW has a strong "produce where you sell" policy which mitigates the impact of the recent tariff wars. Less than 2% of ITW's total spend comes from China. Since 2013 the company has been undergoing a large restructuring program. Achieving about $1 billion in cost savings.

Globally ITW is probably one of the strongest Dividend Growth companies in which to invest.

The company has a healthy A+ S&P credit rating. Dividends grew 19% last year and have grown on average 14% per year for the last 20 years. The current dividend is 2.9%. which is 39% above its 5-year average dividend yield of 2.09%, which could indicate that the share is undervalued. The earnings pay-out ratio is a sustainable 51%. The current dividend is only 46% of the company's free cash flow, leaving sufficient funds for reinvesting to generate growth.

For the last 20 years ITW has provided an annual ROR of 10.4% compared to the S&P 500's 6.6% with dividends reinvested. If the share price returns to its normal P/E ratio then the share can be expected to provide a total annualized ROR of 20% by the end of 2019 and 16% by the end of 2020.


Disclaimer: Please note that I am not a Registered Financial Planner. The articles I write are based on my own personal research and for my own use and is not to be construed as financial planning advice. At all times readers are urged to exercise caution when investing in any financial instruments, to do their own research



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