Illinois Tool Works (ITW) is a conservative stocks which is on a dip as the strong dollar is crimping profit growth. Last qtr ITW would have put out a solid 17% profit growth, but exchange rates sliced that down to 7%. Sales fell 9% in the qtr and this was also hurt by the dollar. ITW stock was $94 for much of the Summer, but fell to $88 after this news was reported. Afterwards, analysts took the company’s Estimated Long Term Growth Rate down from 12% to 6%, but I think the company will be able to grow faster. In its 2014 Annual Report management stated it projects total annual returns of 12% to 14% per year through 2017. This would be made up from 9-10% increases in profits, 1-2% in share repurchases or acquisitions, and a 2% dividend.
The company is a broad manufacturer with many business segments, such as Hobart ovens which you see in local pizzerias. Here’s the rundown with the percentage of total revenue each division kicked in during 2014:
- Automotive original equipment manufacturing, 18%
- Testing and measurement equipment, 15%
- Commercial food equipment, 15%
- Adhesives, sealants, lubrication fluids, 13%
- Welding equipment and consumables, 13%
- Construction fastening systems, 12%
- Specialty products including beverage packaging equipment, 14%
Illinois Tool Works was founded more than 100 years ago and is part of Standard & Poors Dividend Aristocrats list, which is made up of companies that have increased their dividends for 25 consecutive years or more. ITW has grown its dividend each year since 1964 — this will be the 51st consecutive year of increases. The stock also holds Value Line’s top rating safety rating of 1.
Ten Year Chart
The ten-year chart of ITW isn’t as smooth as some of the other conservative stocks I cover, with the 2008-2009 recession hitting the company (and the stock) hard. The down year in 2013 was because the company sold off one of its divisions, and this was met with applause by Wall Street as the stock proceeded to go higher.
The stock was $42 a decade ago, is $88 this qtr, and has paid $12 in dividends for a 138% total return.
Profit History
With the strong dollar hurting profit growth right now, I put ITW’s Fair Value P/E at 16. Profit growth is expected to be just 7% and 8% the next two qtrs.
Sharek’s Take
Illinois Tool Works is the perfect stock for investors in retirement, as ranks 1 in Value Line’s safety rankings and has increased its dividend for 51 consecutive years. I love that management stated it should be able to give total shareholder returns of 12% to 14% per year through 2017. The only issue I have with the stock now is the strong dollar is crimping profits, and this in turn has put ITW on a downward slope as its fallen from around $100 six months ago to $88 now. The stock market is currently praising growth stocks, and since ITW is a value stock I cannot tell investors to jump in now as the trend is your friend and this stock’s trend is currently down. Long term shareholders should stick with this stock, those looking to buy-in could do so here or wait for profit growth to accelerate or a lower entry point.
Update: the day after this article was posted the company increased its dividend from $1.94 to $2.20 per share, giving ITW a yield of 2.5%.
View the One Year Chart here. View the Earnings Table here.
