Dividend Investor Portfolio #18: An Industry of Wealth
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Dear Investor,
Welcome to the 18th edition of TipRanks’ Dividend Investor Portfolio & Newsletter.
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Market-Moving News: July 22, 2024
Markets sailed to new records in the first half of the week, only to see the rally get smothered on Wednesday. The rest of the week ended up marking one of the largest stock declines this year. The S&P 500 (SPX) clocked in its worst week since April, diving by almost 2%, while the Nasdaq Composite (NDAQ) dropped by 3.7% and the large-cap tech benchmark Nasdaq-100 (NDX) tumbled by nearly 4%. In contrast, the Dow Jones Industrial Average (DJIA) managed to finish the week in the green, up by 0.7%, helped by its strong surge in the first half of the week as anxious investors flocked towards value shares. The VIX Volatility index – the measure of market anxiety – surged to its highest levels since April.
Markets entered the historically weak period of July and August with optimism, but the mood in the tech sector began to sour earlier this month. Recent economic data along with Jerome Powell’s remarks have convinced investors that the Fed will begin rate reductions in September. This outlook accelerated the attempts to rotate out of tech stocks, which are widely perceived as overvalued, and into more cyclically oriented sectors that are expected to gain the most from the Federal Reserve’s rate cuts.
Amid heightened investor nervousness towards tech, several developments have coincided to trigger this week’s downfall of semiconductor stocks, starting with soft sales guidance from the world’s most important high-end chip machinery maker ASML (ASML). Later reports emerged that the Biden administration is considering clamping down further on the chip equipment sales to China, which reverberated through the whole semis sector.
Adding to the rotation imperative, as the odds of Donald Trump’s election victory rose, the markets began to embrace the so-called “Trump trades,” including banks, defense, and traditional energy stocks. Trump added to technology’s woes on Wednesday, saying that Taiwan should pay the U.S. for its defense against possible Chinese hostility. The shares of the world’s largest chip foundry Taiwan Semiconductor Manufacturing (TSM) tumbled on the news. TSM makes about 90% of the most advanced semiconductors used in AI applications; its fate is crucial not only for chipmakers but for the entire global economy.
Joe Biden’s announcement about dropping off the election race is driving a sharp rise in the perception of political uncertainty and adding to investor anxiety. As clouds gathered towards the end of the week, the winners of the previous sessions – small caps, financials, and healthcare shares – also sharply declined.
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This Week’s Quality Dividend Stock Idea
Honeywell International, Inc. (HON) is an American multinational industrial and technology conglomerate, headquartered in Charlotte, North Carolina. HON provides industry-specific solutions in the areas of aerospace technologies, building automation, energy, sustainable solutions (including performance materials), and industrial automation businesses in the United States, Europe, and internationally. With a market cap of over $141.4 billion and annual revenues of $36.7 billion, HON ranks #115 on the Fortune 500 list.
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The Making of a Modern Conglomerate
Founded in 1906, Honeywell has undergone many changes such as mergers, acquisitions, spin-offs, and consolidations. Throughout its history, Honeywell International’s engineers have filed numerous inventions, many of which are widely used today, either in their original form or in some iteration. These include autopilot, unleaded gasoline, biodegradable detergents, barcodes, etc. However, in recent years the company seemed to expand a bit too far, which made its operations cumbersome and hindered growth.
Recognizing this challenge, Honeywell underwent a sweeping reorganization at the end of 2023, with the new management shifting the organizational focus to boosting earnings growth by focusing on global megatrends: automation and digitalization, aviation development, and energy efficiency and transition. The reorganization process included simplifying the company’s portfolio and structure, including divesting some non-core or lower-margin activities, while transitioning toward higher-growth segments and complex technologies.
Post-reorganization, the company’s Aerospace Technologies division, which produces fuels, engines, and equipment for aircraft, is the company’s most important growth engine and was responsible for 37% of 2023’s revenues. The Industrial Automation division, which provided 29% of total revenues in 2023, offers products, systems, and software to manage complex industrial processes related to managing power usage, health and safety systems, operations, and digitalization of production and supply chains.
The Building Automation and the Energy and Sustainable Solutions segments are each responsible for 17% of revenues. The BA segment offers controls, hardware, and software needed to effectively manage the power and safety needs of modern commercial buildings, while the ESS segment offers various chemicals, materials, and total solutions for performance improvement, decarbonization, efficiency, and modernization in manufacturing, aerospace, automotive, and other industries. In addition, the company offers Honeywell Forge – an integrated configurable software platform helping clients across various industries to hasten digitalization and automation while improving operational performance, sustainability, and quality of their products and services.
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Earnings Growth Expected to Accelerate
Honeywell operates in multiple industries, holding leading positions in many of its end markets. Over the years, it has built a large and loyal customer base, supported by HON’s robust technological capabilities and effective product development. Its strong market standing provides it with a significant competitive advantage. The company wields one of the largest installed bases of equipment among global industrial conglomerates, deriving 30% of its revenue from recurring aftermarket services. HON’s wide diversification allows for the mitigation of risks stemming from economic cycles affecting specific sectors and industries.
As a result of these factors, HON consistently generates solid financial results, demonstrating high revenue stability. In the past three years, the company’s revenues have grown at a CAGR of 4.2%, while its earnings-per-share rose at a CAGR of 9.7%. However, the company’s recent increased focus on attractive end markets, as well as on generating higher-growth software sales and recurring revenue, are expected to drive stronger margins and improved operating efficiency. Analysts expect that the company’s EPS growth will accelerate at a minimum to low double digits in the next two years.
Honeywell excels in terms of capital efficiency and profitability, with its ROE, ROA, and ROIC metrics, as well as its operating, FCF, and net profit margins falling within the top 25% of its industry. The company has exceeded analysts’ EPS estimates in all quarters since 2020.
The company has recently made several major acquisitions aimed at accelerating its earnings growth. In July, Honeywell announced a deal to acquire the liquefied natural gas process technology and equipment business from Air Products & Chemicals Inc. for $1.81 billion in cash. As the global share of LNG in total energy supply continues to grow, the buyout – expected to close by the end of the year – would allow HON to capitalize on yet another global trend.
The deal is the fourth acquisition for Honeywell over the last several months. In June, it announced a $2 billion deal to buy aerospace and defense technology company CAES Systems. In March, HON said it would acquire an Italian aircraft components manufacturer Civitanavi Systems for about $250 million. In December 2023, Honeywell bought out a security business unit of Carrier Global for $5 billion.
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Strong Finances Support Dividends and Buybacks
Despite multiple acquisitions and heavy R&D investment, Honeywell is a financially sound company. While multiple recent acquisitions have increased its debt, it is well-covered by operating cash flow, while the interest it pays on debt is covered by EBIT many times over.
HON’s strong financial position is reflected by its high credit ratings: its debt is rated “A” at S&P Global and Fitch. Particularly, Fitch recently praised Honeywell’s “large scale, product and geographic diversification, a large installed base, substantial recurring revenue, strong technological capabilities, and effective product development that supports HON’s competitive position.” In addition, Fitch applauded the company’s “high level of financial flexibility, including steady FCF through business cycles,” which reduces concerns about leverage.
Honeywell has committed to deploy at least $25 billion to mergers and acquisitions, dividends, capital expenditures, and share buybacks over the next three years.
The industrial and software giant has been paying dividends since 1972; it has registered steady annual increases in its cash payouts to shareholders since 2011. Honeywell pays a dividend yield of 1.95%, higher than the 1.64% average for the Industrial sector. The company has been raising its payout at a CAGR of 6% in the past five years, with the rate of growth expected to accelerate to 6.5%-7% in the next three years. HON’s modest payout ratio of 45.5% is more than sustainable, leaving the company with ample net earnings to invest in its organic and inorganic business growth.
Besides dividends, HON rewards its investors with opportunistic, but very generous buybacks. In April 2023, the company’s Board of Directors authorized a new buyback program, which includes a repurchase of up to $10 billion of the company’s common stock. Within this authorization, the company repurchased $3.7 billion of common stock during 2023, adding another $671.3 million in the first quarter of 2024.
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A Play on Quality and Value
In a way, owning Honeywell shares resembles investing in an ETF, because of the company’s wide business diversification. Honeywell is the U.S.’s last industrial conglomerate, spanning numerous sectors, industries, and technologies. The conglomerate structure helps the company maintain its rock-solid business, as its different business segments ride various stages of the economic cycle. For example, when the Aerospace segment suffered during COVID-19, Honeywell’s other segments partially compensated for the slump.
As a result, the company’s stock performance has also been fairly stable compared to its sector, with the absence of notable melt-ups compensated by the lack of significant sell-offs. In the past 12 months, HON’s shares have risen by 5.2%. The stock’s valuation is in line with the average for its sector and close to the bottom of the price range for its peers in the industry. Based on projected cash flows, Honeywell appears to be undervalued by about 25%, adding value attractiveness to the appeal of quality.
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Investing Takeaway
Honeywell International enjoys revenue diversity and is well-positioned to experience sustained tailwinds as it capitalizes on global megatrends. With more than a decade-long record of consecutive dividend increases, backed by a rock-solid business model, a healthy balance sheet, and the size and breadth to withstand any downturn, HON is expected to continue rewarding its shareholders for years to come. These factors, coupled with its modest valuation, make Honeywell an attractive addition to long-term income portfolios.
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Dividend Investor Portfolio
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Portfolio News
¤ BlackRock (BLK) reported its Q2 2024 results last week. The world’s largest money manager significantly surpassed analysts’ EPS expectations, with profits boosted by a stock market rally and higher performance fees. Assets under management (AUM) increased to a record $10.7 trillion, up 13% from a year earlier.
¤ Verizon (VZ) will reported its Q2 2024 results later today.
¤ The next few days will feature earnings announcements from three more Portfolio companies: Philip Morris (PM) will report its Q2 2024 results on July 23rd, Qualcomm (QCOM) will release its FQ3 2024 earnings report on July 24th, and Q2 2024 results of Edison International (EIX) are scheduled to be published on July 25th.
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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.
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Portfolio Attributes
Dividend Portfolio Yield |
Dividend Growth Rate | Annual Dividend Income |
3.74% | 9.31% | $3,762.20 |
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) | Sep 10, 2024 | Oct 03, 2024 | 2.18% | $5.60 |
Allianz SE ADR (ALIZY) | May 08, 2025 | May 13, 2025 | 5.25% | $1.50 |
Amgen (AMGN) | Aug 16, 2024 | Sep 06, 2024 | 3.23% | $9.00 |
BlackRock (BLK) | Sep 06, 2024 | Sep 23, 2024 | 2.55% | $20.40 |
Edison International (EIX) | Jul 08, 2024 | Jul 31, 2024 | 4.29% | $3.12 |
JPMorgan Chase (JPM) | Jul 05, 2024 | Jul 31, 2024 | 2.20% | $4.60 |
Kroger (KR) | Aug 15, 2024 | Sep 01, 2024 | 2.32% | $1.28 |
LyondellBasell (LYB) | Aug 30, 2024 | Sep 05, 2024 | 5.07% | $5.36 |
Philip Morris (PM) | Sep 12, 2024 | Oct 10, 2024 | 5.82% | $5.20 |
Qualcomm (QCOM) | Aug 29, 2024 | Sep 20, 2024 | 2.03% | $3.40 |
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Click here for more stock market analysis from TipRanks Macro & Markets research analyst Yulia Vaiman
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Disclaimer
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