This Prominent Dividend-Paying Company Consistently Fulfills Investor Commitments. Understand Why It's Worth Investing in Currently.
Dividend Kings, like Illinois Tool Works (ITW), are a goldmine for investors seeking reliable sources of passive income. Yet, not all Dividend Kings consistently deliver significant dividend increases or have robust business models.
With an impressive 61-year streak of escalating quarterly payouts and a dividend tripled within the last decade, ITW has transformed into a formidable passive income powerhouse. Recently, ITW disclosed its full-year 2024 results and shared predictions for 2025.
A versatile conglomerate
ITW, an industrial conglomerate, boasts an array of brands organized under seven business segments: automotive original equipment manufacturing, construction products, food equipment, polymers and fluids, specialty products, test and measurement and electronics, and welding. Unlike other conglomerates, ITW allows customer requirements to drive product development, implementing its customer-back innovation (CBI) strategy to cater to evolving market demands.
For instance, ITW attributes its soaring welding margins to CBI investment, making it the conglomerate's highest-margin segment. In 2024, ITW invested approximately $800 million to foster growth across its core business units and is determined to boost CBI investments in the future. Its patent filings saw a 18% surge in 2024, reflecting its innovation focus aimed at tackling customer challenges.
Boosting profitability
Since 2009, ITW has managed to more than double its operating margins by prioritizing operational efficiency and profitability, rather than sales. In 2024, six of its segments registered margin improvements, propelling ITW to its highest-ever operating margins of 26.8%. ITW anticipates enterprise initiatives contributing another 100-basis-point increase to operating margins in 2025.
Its ambition to reach 30% operating margins by 2030, alongside goals of 4% annual organic growth, a 7% jump to the annual dividend, 9-10% average annual earnings-per-share growth, and 100% free cash flow conversion, puts ITW on a solid growth trajectory. In 2024, it paid out $1.7 billion in dividends and repurchased $1.5 billion in shares, signifying high free cash flow availability to support both payouts and share repurchases.
Enduring market cycles
Although ITW boasts impressive margins and a robust capital return program, it projects only modest 0% to 2% organic growth and GAAP EPS of $10.15 to $10.55 for 2025, despite a strong US dollar impact. It expects no significant short-term growth, balancing cautious optimism and preparedness for a potential prolonged downturn or increased tariffs.
Notably, ITW's structure grants it special resilience in navigating market cycles. Its 84 divisions spread across seven segments enable it to absorb specific market downturns and protect against over-exposure to any single segment. The diversity in its segment earnings, with individual segments contributing 11% and 17% to 2024 operating income, ensures ITW's adaptability and resilience.
An investment with premium potential
ITW isn't a cheap stock, boasting a 2.3% dividend yield that pales in comparison to higher-yielding Dividend Kings like Coca-Cola or PepsiCo. However, ITW's exceptional stability, sustainable dividend payouts, and capital return program backed by strong free cash flow make it an appealing choice for investors willing to pay a premium.
As evidenced by ITW's performance in 2023 and 2024, it remains able to pay dividends and buy back shares with cash even during periods of market slowdown. Its agility in adapting to market fluctuations is a key strength, enabling it to benefit from any potential recovery or pivot as necessary.
In conclusion, ITW is a worthwhile investment for investors who appreciate a premium-priced but robust business.
- Investors interested in faster dividend increases might want to consider other Dividend Kings besides ITW, as not all companies in this category deliver consistent dividend growth or have reliable business models.
- ITW's focus on customer-back innovation (CBI) strategy, which allows customer requirements to drive product development, has significantly contributed to its growth in the welding segment, making it the conglomerate's highest-margin segment.
- To further boost its profitability, ITW plans to increase its investments in CBI and anticipates an additional 100-basis-point increase to its operating margins in 2025.
- Despite its impressive performance and growth projections, ITW's stock may come at a premium, with a relatively lower dividend yield compared to other Dividend Kings, but its exceptional stability, sustainable dividend payouts, and high free cash flow availability make it an attractive investment choice for many investors.
