Illinois Tool Works: A Look at the High-Flying Dividend King The Unstoppable Rise of Illinois Tool Works

By: Alex Freidmen

Dividend Kings, companies that have paid and raised their dividends for at least 50 years, signal consistent performance and growing earnings. Illinois Tool Works (NYSE: ITW), commonly referred to as ITW, defies stereotypes associated with such stalwart companies.

ITW expanded its industrial empire across varied sectors, including automotive, food equipment, test and measurement, electronics, welding, polymers and fluids, construction products, and specialty products. While its rivals like Honeywell and 3M faced market headwinds, ITW surged, delivering a 119.4% total return in the last five years, surpassing the S&P 500’s performance. Despite the market frenzy for tech giants, ITW held its ground, boasting an impressive 18.9% stock gain in 2023, albeit below the S&P 500’s 24.2% uptick.

The company’s rise, somewhat against the conventional grain, begs the question: Can ITW’s upward trajectory continue in 2024 and beyond?

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Strategic Emphasis on Quality Growth

Investing in a stock hinges on the belief that future earnings will surpass the current figures. Despite ITW’s 24.6 price-to-earnings ratio, it has carved a niche, leveraging quality and reliability to justify its valuation, given that it isn’t the fastest-growing company. ITW’s unique approach banks on acquisitions, sales volume, and margins as growth drivers.

The company’s net income outpacing revenue growth indicates remarkable margin growth. In the third quarter, ITW achieved its highest-ever quarterly operating margin of 26.5%, surging past Apple’s operating margin. This strategic agility underscores ITW’s clout as a heavyweight in the inductor sector.

A Laser Focus on Margins

ITW’s blueprint centers on efficiency over sales expansion. By 2030, the company aims for a 30% operating margin and 9-10% average annual earnings-per-share growth, complemented by a 7% annual dividend increase and 4% organic growth. Bolstered by margin expansion and robust buybacks, ITW mirrors Apple’s prowess in delivering strong margins and shareholder returns, an astonishing feat for an industrial conglomerate.

ITW’s distinct business model treats each segment as a standalone entity, empowering them with flexibility. In its 2023 investor day presentation, ITW underscored its supremacy, boasting higher margins than its peers in every category, cementing its status as an industry leader.

Illinois Tool Works: The Reigning Dividend King

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The Reigning Dividend King: Illinois Tool Works

When a company consistently outperforms its peers by a huge margin, it’s more than just a statistical anomaly—it’s a testament to the underlying culture and management. Illinois Tool Works (ITW) stands head and shoulders above its peers, not just with its superior products, but also as a better-run organization altogether.

ITW: A Top-Notch Dividend King

In August, ITW achieved a remarkable milestone by raising its dividend for the 53rd consecutive year to an all-time high of $1.40 per share per quarter. Despite not offering the highest yield at 2.2%, ITW’s value proposition extends beyond just its dividends. The company excels across various aspects, from operating a robust business and maintaining a healthy balance sheet to rewarding shareholders with buybacks and dividends. Unlike other Dividend Kings, where dividends take the spotlight, ITW has been a stellar stock to own over the years, even without the lure of a dividend. The returns speak for themselves.

All signs point to ITW remaining an outstanding Dividend King, with the potential to surge even higher in 2024.

Is Illinois Tool Works a $1,000 Investment Opportunity?

Before considering an investment in Illinois Tool Works, it’s essential to note that the Motley Fool Stock Advisor analyst team did not include it among their 10 best stocks for investors to buy. However, it’s crucial to recognize that the 10 stocks identified are projected to yield substantial returns in the ensuing years.

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Disclosure: John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Apple, and Netflix. The Motley Fool recommends 3M. The Motley Fool has a disclosure policy.