This article originally appeared on The DIV-Net May 11, 2009.
Linked here is a detailed quantitative analysis of Illinois Tool Works Inc (ITW). Below are some highlights from the above linked analysis:
Company Description: Illinois ToolWorks Inc. is a diversified manufacturer operates a portfolio of about 750 industrial and consumer businesses located throughout the world.
Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:
- Avg. High Yield Price
- 20-Year DCF Price
- Avg. P/E Price
- Graham Number
ITW is trading at a discount to only 1.) above. If I exclude the high and low valuations and average the remaining two, ITW is trading at a 28.8% premium. ITW had a Star deducted for trading at a premium in excess of 5%.
Dividend Analytical Data: In this section I consider five factors, see page 2 of the linked PDF for a detailed description:
- Rolling 4-yr Div. > 15%
- Dividend Growth Rate
- Years of Div. Growth
- 1-Yr. > 5-Yr Growth
- Payout 15% of avg.
ITW earned one Star in this section for 3.) above. ITW has paid a cash dividend to shareholders every year since 1933 and has increased its dividend payments for 46 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)? 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:
- NPV MMA Diff.
- Years to > MMA
ITW earned both of the available Stars in this section. The NPV MMA Diff. of the $3,245 is in excess of the $2,500 minimum I look for in a stock that has increased dividends as long as ITW has. If ITW grows its dividend at 5.1% per year, it will take 1 year to equal the cumulative earnings from a MMA yielding an estimated 20-year average rate of 3.64%. ITW earned a Star since its Years to >MMA of 1 is less than 5 years.
Other: ITW is a member of the S&P 500 and a member of the Broad Dividend Achievers™ Index. ITW has a strong balance sheet with a relatively low debt and generates high levels of free cash flow relative to net income. Looking ahead, ITW should continue to grow EPS via acquisitions and share repurchases. Risks would include a continued downturn in industrial activity and/or capital spending, integration of acquisitions and continued escalation of raw material costs.
Conclusion: ITW lost one Star in the Fair Value section, earned one Star in the Dividend Analytical Data section and earned two Stars in the Dividend Income vs. MMA section for a net total of two Stars. This quantitatively ranks ITW as a 2 Star-Weak stock.
Using my D4L-PreScreen.xls model, I determined the share price could increase to $35.34 before BRC’s NPV MMA Differential fell to the $3,000 that I like to see for a stock with over 25 consecutive years of dividend increases. At that price the stock would yield 3.51%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the needed $3,000 NPV MMA Differential, the calculated rate is 4.8%. This dividend growth rate is slightly below the 5.1% used in this analysis, thus providing a small margin of safety. ITW has a risk rating of 1.75 which classifies it as a medium risk stock.
2009 will likely be a difficult year for ITW due to the slowing global economy, along with reduced activity in the automotive and construction industries. ITW is a good company, but currently selling at a premium. Given its near-term prospects, we will likely see entry points closer to my buy price of $26.92. For additional information, including the stock’s historical dividend information, please refer to its data page.
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 (2.8% of my Income Portfolio).
What are your thoughts on ITW?