Company Description: Illinois Tool Works Inc. is a diversified manufacturer that operates a portfolio of 60 business units that serve 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 premium to all four valuations above. Since ITW's tangible book value is not meaningful, a Graham number can not be calculated. When also considering the NPV MMA Differential, the stock is trading at a 45.9% discount to its calculated fair value of $379.21. 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 1.) and 3.) above. A Star was earned since the Free Cash Flow payout ratio was less than 60% and there were no negative Free Cash Flows over the last 10 years. ITW earned a Star for having an acceptable score in at least two of the four Key Metrics measured. Rolling 4-yr Div. > 15% means that dividends grew on average in excess of 15% for each consecutive 4 year period over the last 10 years (2010-2013, 2011-2014, 2012-2015, etc.) I consider this a key metric since dividends will double every 5 years if they grow by 15%. The company has paid a cash dividend to shareholders every year since 1933 and has increased its dividend payments for 57 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 $3,730. 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 15.0% per year, it will take 2 years to equal a MMA yielding an estimated 20-year average rate of 2.74%. ITW earned a check for the Key Metric 'Years to >MMA' since its 2 years is less than the 5 year target.
Peers: The company's peer group includes: The The Manitowoc Company, Inc. (MTW) with a 0.0% yield, Timken Co. (TKR) with a 1.5% yield and Highway Holdings Limited (HIHO) with a 6.3% 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 $462.34 before ITW's NPV MMA Differential decreased to the $500 minimum that I look for in a stock with 57 years of consecutive dividend increases. At that price the stock would yield 1.0%.
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 7.6%. This dividend growth rate is lower than the 15.0% used in this analysis, thus providing a margin of safety. ITW has a risk rating of 1.75 which classifies it as a Medium risk stock.
ITW has a history of generating above-average returns from growth in its end markets, along with a growth strategy focused on product innovation and acquisitions. The company follows a consistent policy of returning value to its shareholders through dividends and share buybacks.
The company's debt to total capital of 75% (up from 72%), is above my preferred maximum of 45%. Its free cash flow payout is 55% (up from 50%), is well below my 60% maximum. The stock is currently trading at a discount to my calculated fair value price of $259.47. However, its current yield is below my minimum so, for now, I will wait before adding to my position.
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 (3.4% of my Dividend Growth Stocks Portfolio).
Related Articles:
- Lockheed Martin Corp. (LMT) Dividend Stock Analysis
