Dividend Investor Portfolio #10: Agile Tool King


Dear Investor,

Welcome to the 10th edition of TipRanks’ Dividend Investor Portfolio & Newsletter.



Market-Moving News: May 27, 2024

Stocks ended the turbulent week on a higher note, with the S&P 500 (SPX), Nasdaq Composite (NDAQ), and Nasdaq-100 (NDX) rising for a fifth straight week. Tech stocks gained thanks to renewed investor optimism, boosted by Nvidia’s (NVDA) blockbuster report and guidance. On the flip side, the Dow Jones Industrial Average (DJIA) snapped its string of weekly increases, recording its biggest weekly loss since early April.

Investor sentiment was shaken by the minutes from the Federal Reserve May meeting, which revealed that the members of the rate-setting committee were concerned about stickier-than-anticipated inflation pressures and felt that there was no reason to cut interest rates before they received sufficient evidence that price increases were under control. Some policymakers have even suggested that the central bank should lift rates if economic data comes in hotter than expected.

Meanwhile, last week’s data points reflected a still-resilient economy, with weekly jobless claims, manufacturing and services PMIs, and durable goods orders coming in better than expected. Consumer sentiment also improved from last month, while 5-year household inflation expectations suggested slower price increases ahead. At this point, the incoming numbers seem to confirm that there is no apparent need for the Fed to rush with the rate cuts.



This Week’s Quality Dividend Stock Idea

Illinois Tool Works Inc. (ITW) is a global multi-industry manufacturing powerhouse, which offers various industrial products and equipment throughout the United States and around the world. ITW’s products and solutions are an integral part of numerous products, from dishwashers to vehicles to aerospace missions.


Highly Diversified Business

ITW’s diversified business portfolio is comprised of seven reporting segments that operate in various global industries. These segments, arranged according to their end markets, are Automotive OEM (20% of the company’s 2023 revenues), Test & Measurement and Electronics (18%), Food Equipment (16%), Construction Products (13%), Welding (12%), Polymers & Fluids (11%), and Specialty Products, aka niche industrial applications (10%).

About 57% of ITW’s total revenues arrive from the U.S., with shares ranging from 37% in Automotive OEM to 83% in Welding. The remainder is split between EMEA (Europe and the Middle East) and APAC (Asia Pacific) markets.


A Global Leader Status

The company was established in 1912 and quickly grew its portfolio of innovative offers. ITW expanded through domestic and international acquisitions, reaching every corner of the globe by the 2000s. Today, with a market capitalization of $71.6 billion and an annual revenue of over $16 billion, Illinois Tool Works is a Fortune 200 company (i.e., it ranks within the top 200 spots on the Fortune 500 list).

Besides strategic acquisitions and quality products, another factor that has helped ITW transform into a global manufacturing leader is its business model, which has become one of the company’s greatest competitive advantages. The ITW model is comprised of three elements: 80/20 front-to-back process, which emphasizes focusing on its largest revenue generators; customer-back innovation, which encourages innovation according to customer feedback; and decentralized entrepreneurial culture, which increases flexibility and rewards excellence.

Another competitive advantage of ITW over its peers is the company’s dedication to innovation. The company holds ~19,600 granted and pending patents. Thanks to this culture of innovation, which is supported by heavy investment in R&D, as well as its agile corporate culture and solid management, within the past decade ITW has succeeded in growing its market cap by 3.4x and its operating income by 42%, while tripling its EPS and raising its DPS by 3.7x.


Already Delivering on New Strategy

Through the years, the company’s strategy has been focusing on the most profitable business lines while exiting lower-margin ones. This has helped to transform ITW into a high-margin, highly profitable business. In fact, the company’s operating and net profit margins are in the top 10% of its industry, whereas its capital efficiency and profitability metrics – such as ROE, ROA, ROCE, and ROIC – are in the top 5%.

Up until this point, dozens of acquired companies have been integrated into ITW’s agile, decentralized business model. In 2024, ITW launched a new strategy centered around organic growth. Within this strategy, by 2030 the company aims to reach ~30% operating margin, 4%+ annual average organic revenue growth, 100% FCF as a share of net income, 9-10% annual EPS growth, and 7%+ annual dividend increase.

The plan appears completely achievable given ITW’s track record of robust financial performance and solid delivery on its previous guidance. Thus, in the past 16 quarters, there was just one occurrence when a quarterly EPS didn’t beat analysts’ expectations. In the last reported quarter, ITW reported a 16% year-on-year expansion in operating income, operating margins of 28.4%, and a 17% increase in earnings-per-share, strongly surpassing estimates. Building on the strong margin and profitability performance, the company lifted its full-year operating margin and EPS guidance.


Dividend King’s Golden Crown

Illinois Tool Works has been paying and annually increasing its dividends since 1971. This 53-year-long track record means that ITW is a Dividend King – a status reserved for firms that have increased their payouts for over half a century.

As of today, ITW’s dividend yield stands at 2.3%, much higher than the Industrial sector average. In the past decade, dividends grew at a ~13% annual rate, with the payout growth slowing to around 7% over the past five years as the dividend reached higher levels. The company has stated that it aims to continue raising its dividends at an average annual rate of 7% through 2030. Given its balance sheet strength and robust profitability, analysts foresee many more years of dividend growth ahead.


Total Return in Focus

ITW is committed to a long-term capital allocation strategy, which is highly focused and specific. The pillars of the strategy are (1) deploying capital only where ITW can create a meaningful and sustainable competitive advantage and (2) returning the remaining capital to shareholders. ITW’s capital allocation framework assigns 20-25% of operating cash flows to internal investments to support organic growth and sustain the core business; 35-45% to dividend payments and increases; and 40-50% to both acquisitions and share repurchases.

In August 2023, ITW’s board of directors approved a $5 billion buyback program. During 2023, the company repurchased shares for the amount of $1.5 billion and plans to spend the same amount on buybacks this year. In the first quarter of 2024, ITW bought back its stock for approximately $365 million. The continued aggressive buybacks are supported by the company’s strong free cash flows, expected to exceed 100% of net income in 2024.

The company has been seizing the opportunity to buy back its shares at a reasonable price, as its stock has come down from March’s all-time high by about 11%. As a result, ITW’s P/E has also slipped back to the sector median. Illinois Tool Works’ valuation comes at the bottom of the price scale for its peers in the industry. Furthermore, based on projected cash flows, the company trades about 15% below its fair value.


Investing Takeaway

Illinois Tool Works is an industrial behemoth with margin expansion and EPS growth rates that far surpass even its much smaller competitors. The company’s diverse product portfolio and its decentralized business model help it adapt to market dynamics and thrive through all economic cycles. ITW’s agility and focus on high-growth opportunities are expected to continue supporting its shareholder compensation strategy for years to come. The stock’s current moderate valuation signals a compelling combination of growth and value, while providing an attractive opportunity to include ITW in long-term income portfolios.


Dividend Investor Portfolio


Portfolio News

¤ Since its creation in February, our Dividend Portfolio has strongly outperformed the S&P 500, with 11.3% gain versus the index’s 6%. The best performers have been Qualcomm, Kroger, and Edison International. Meanwhile, the portfolio’s Beta (risk/volatility measure) is benign at 0.9.

¤ LyondellBasell (LYB) has announced a 7% increase to its quarterly dividend payout. The dividend of $1.34 will be paid to shareholders on June 10th, with an ex-dividend and record date of June 3rd. This marks the 14th consecutive annual dividend increase for LYB.

¤ Qualcomm (QCOM) will go Ex-dividend on May 30th, with the payment date on June 20th. This quarter’s payout is $0.85 per share, versus $0.80 per share in the previous period.


Recent Trades

None at the moment, although we are considering adding a stock to our portfolio when the market conditions allow for an attractive entry point. Stay tuned.


Portfolio Attributes

Dividend Portfolio Yield
Dividend Growth Rate Annual Dividend Income
3.70% 8.37% $3,736.00
Yield-on-Cost Adjusted
 Weighted Growth Equal-Weight 100K Portfolio


Current Portfolio

Name EX-Dividend Date Payment Date Dividend Yield  Annual DPS 
Automatic Data Processing (ADP) Jun 14, 2024 Jul 01, 2024 2.18% $5.60
Allianz SE ADR (ALIZY) May 08, 2025 May 13, 2025 5.25% $1.50
Amgen (AMGN) May 16, 2024 Jun 07, 2024 3.23% $9.00
BlackRock (BLK) Jun 07, 2024 Jun 23, 2024 2.68% $20.40
Edison International (EIX) Jul 01, 2024 Jul 28, 2024 4.29% $3.12
JPMorgan Chase (JPM) Jul 05, 2024 Jul 31, 2024 2.20% $4.60
Kroger (KR) May 14, 2024 Jun 01, 2024 2.02% $1.16
LyondellBasell (LYB) Jun 03, 2024 Jun 10, 2024 5.07% $5.36
Philip Morris (PM) Jun 22, 2024 Jul 11, 2024 5.82% $5.20
Qualcomm (QCOM) May 30, 2024 Jun 20, 2024 2.03% $3.40



Click here for more stock market analysis from TipRanks Macro & Markets research analyst Yulia Vaiman



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