Company Description: Illinois Tool Works Inc. is a diversified manufacturer that operates a portfolio of 60 business units that serve the industrial and consumer markets globally.
Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these four calculations of fair value, see page 2 of the linked PDF for a detailed description:
1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number
ITW is trading at a discount to 1.) and 3.) above. The stock is trading at a slight discount to its calculated fair value of $42.11. ITW earned a Star in this section since it is trading at a fair value.
Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:
1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div. > 15%
ITW earned two Stars in this section for 2.) and 3.) above. The stock earned a Star as a result of its most recent Debt to Total Capital being less than 45%. ITW earned a Star for having an acceptable score in at least two of the four Key Metrics measured. The company has paid a cash dividend to shareholders every year since 1933 and has increased its dividend payments for 48 consecutive years.
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA) or Treasury bond? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:
1. NPV MMA Diff.
2. Years to > MMA
ITW earned a Star in this section for its NPV MMA Diff. of the $620. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as ITW has. If ITW grows its dividend at 6.3% per year, it will take 4 years to equal a MMA yielding an estimated 20-year average rate of 4.1%. ITW earned a check for the Key Metric 'Years to >MMA' since its 4 years is less than the 5 year target.
Memberships and Peers: ITW is a member of the S&P 500 and a member of the Broad Dividend Achievers™ Index and a Dividend Champion. The company's peer group includes: The Cooper Industries plc (CPE) with a 2.8% yield, Timken Co. (TKR) with a 2.4% yield and Kaydon Corporation (KDN) with a 2.6% yield.
Conclusion: ITW earned one Star in the Fair Value section, earned two Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of four Stars. This quantitatively ranks ITW as a 4 Star-Strong stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $43.73 before ITW's NPV MMA Differential increased to the $500 minimum that I look for in a stock with 48 years of consecutive dividend increases. At that price the stock would yield 3.2%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $500 NPV MMA Differential, the calculated rate is 5.7%. This dividend growth rate is below the 6.3% used in this analysis, thus providing a margin of safety. ITW has a risk rating of 1.25 which classifies it as a Low risk stock.
ITW generates above-average returns by providing organic growth with innovative products and by focusing on strategic acquisitions. High levels of profitability are achieved in its base businesses, and acquired businesses, as a result of its operational tools known as 80/20. Benefits are being recognized from a shift to more centralized operations versus a decentralized model.
This stock is one of those that is hard to buy when things are going well. Its low debt level and good free cash flow make it a desirable target for many investors. The recent decline in the market, and its share price, is providing a rare window of opportunity. ITW is reasonable priced relative to my calculated fair value price of $42.11. It is now on my watch list to buy.
Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.
Full Disclosure: At the time of this writing, I was long in ITW (1.0% of my Dividend Growth Portfolio). See a list of all my dividend growth holdings here.
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Tags: [ITW] [CPE] [TKR] [KDN]