Friday, August 12, 2011

Illinois Tool Works Stock Analysis

Illinois Tool Works Inc. (ITW) manufactures a range of industrial products and equipment worldwide. Illinois Tool Works is a dividend champion, has paid uninterrupted dividends on its common stock since 1933 and increased payments to common shareholders every year for 47 years. The most recent dividend increase was in August 2010, when the Board of Directors approved a 9.70% increase to 34 cents/share.

The largest competitors of Illinois Tool Works include Timken Co (TKR), Kaydon Corp (KDN) and SKF AB (SKFRY).

Over the past decade this dividend growth stock has delivered an annualized total return of 8.10% to its shareholders.
The company has managed to deliver an increase in EPS of 9.70% per year since 2002. Analysts expect Illinois Tool Works to earn $3.93 per share in 2012 and $4.59 per share in 2013. In comparison Illinois Tool Works earned $3.03 /share the company earned in 2011.

The returns on equity are on the rebound, after hitting a low of 11.80% in 2010. Right now this indicator is on the rebound, as higher expected earnings would certainly improve returns on equity. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.
The annual dividend payment has increased by 13.40% per year over the past decade, which is much higher than the growth in EPS.
A 13% growth in distributions translates into the dividend payment doubling almost every five and a half years. If we look at historical data, going as far back as 1987, we see that Illinois Tool Works has actually managed to double its dividend every five years on average.

Over the past decade the dividend payout ratio increased from 32% to 42%. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.
Currently Illinois Tool Works is trading at 16 times earnings, yields 2.30% and has a sustainable dividend payout. I would consider adding to my position in the stock on dips below 54.

Full Disclosure: Long ITW

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