Honeywell International (HON 0.22%) was part of a major shakeup in the Dow Jones Industrial Average. On Aug. 31, 2020, Honeywell, Salesforce, and Amgen joined the Dow, replacing Raytheon Technologies (now RTX), ExxonMobil, and Pfizer, respectively.
Honeywell stock popped toward the end of 2020. But over the past three years, the stock has been close to dead money, returning just 2.7% even when factoring in dividends. Here's why Honeywell stock deserved to languish, but why it could be a dividend stock worth buying now.
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Honeywell is bogged down
One look at the last five years of Honeywell's revenue and earnings, and it's hard to see how this company would be worth investing in at all.
HON Revenue (TTM) data by YCharts
Given its weak results, it's unsurprising that the industrial conglomerate has underperformed the market as of late. Honeywell has four segments -- Aerospace (commercial aviation equipment, commercial aviation aftermarket, defense, and space), Honeywell Building Technologies (products and building solutions), Performance Materials and Technologies (process solutions, advanced materials, Honeywell UOP for oil and gas), and Safety and Productivity Solutions (sensing and safety technologies, productivity solutions and services, warehouse and workflow solutions). Needless to say, Honeywell is a complicated and diverse business.
The industrial conglomerate business model has its pros and cons. When executed effectively, each individual business unit is self-reliant. And when you add them all together, they give the overarching business diversification and protect against cyclicality that can occur in end markets.
A good example is Illinois Tool Works (ITW 0.05%), which has seven high-margin, highly profitable business units. The company enjoys top-line growth and margin expansion, which supports a sizable stock repurchase program and a reliable dividend. Illinois Tool Works is a Dividend King with 53 consecutive years of dividend increases.
Then you have companies like General Electric (GE 0.68%) that became bloated and inefficient. GE began selling off assets. And eventually, in January 2023, GE spun off its healthcare business. The decision has been a resounding success. After decades of underperforming the market, the stock is up 67.1% over the last year.
I'm not saying that Honeywell has reached GE-level stagnation. But its growth has ground to a halt, and something has to change.
Honeywell needs a makeover
No matter the business unit, Honeywell's overarching strategic plan (for a while now) has been integrating the digital world with the physical world. Essentially, increasing the performance and visibility of a product through sensors and data management.
An easy-to-understand example would be the difference between a traditional thermostat and the Honeywell Small and Medium Building Administrator. The cloud-based solution can monitor temperature controls across multiple sites to optimize comfort and save on energy costs.
Having so many business units and doing so many things gives Honeywell diversification. But it has also made it stodgy and overcomplicated. Years of promising innovation and investing heavily in the industrial internet of things have failed to translate to near-term benefits.
But if Honeywell can realign its business, become more flexible, and better articulate the performance of its newer products and services, then it could help the company enter a new growth phase.
On Dec. 11, Honeywell published a press release that could mark the beginning of this new growth period. The company is prioritizing organic growth by leaning into three megatrends -- automation, the future of aviation, and the energy transition. To quote the press release, "This strategic clarity empowers our business leaders to better prioritize R&D efforts, capital expenditures, and go-to-market strategies, enabling us to make the right choices to drive higher levels of organic growth." Honeywell is taking a step in the right direction by giving its teams more room to operate and cutting some of the inevitable red tape with such a large enterprise.
It also supports acquisitions to accelerate its growth. The press release states, "The realignment provides the foundation for further portfolio optimization as we endeavor to fully align to our three compelling themes underpinned by digitalization. Our robust acquisition pipeline is focused on adding bolt-on businesses that fit these themes, while we are targeting select dispositions by trimming lines of business that are not aligned." Put another way, Honeywell is going under the hood to drive organic growth, make acquisitions supporting that growth, and sell off whatever falls outside these objectives. If Honeywell executes this plan, the company should become simpler and more streamlined.
Despite these efforts, Honeywell is still only guiding for 4% to 7% organic growth, which would translate to low double-digit growth once factoring in margin expansion. In 2022, Honeywell posted organic growth of 6%, averaged just 5% organic growth between 2017 and 2021, and just 1% between 2014 and 2016. Needless to say, the last decade has featured lackluster growth, so investors shouldn't give Honeywell the benefit of the doubt.
Honeywell's complex structure can mask the progress of individual technologies and make it difficult to decipher the performance of legacy business units and new efforts. For example, Honeywell Forge is the company's software as a service solution -- covering for multiple industries. But given the breadth of Honeywell Forge, it's challenging to see the precise financial impact it is having on the business.
Honeywell's reporting reminds me of Amazon or Apple years ago. In the past, Amazon wouldn't single out Amazon Web Services' performance. And Apple wouldn't separate its hardware from its services. It made it challenging to know just how effective these aspects of the business were and, frankly, left investors in the dark. I'd like to see Honeywell split hardware and software by segment. That way, investors can get a better reading on growth and margins.
Honeywell has plenty of potential
Admittedly, it may be a little early to buy Honeywell, as it could take years for its plan to materialize. Patient investors willing to wait will benefit from Honeywell's dividend, which yields 2.1% and has been increased for 13 consecutive years.
In addition to opaque reporting methods, I'd argue that Honeywell has been held back by good old-fashioned top-down corporate inefficiency more than a lack of innovation or losing ground to competitors. By realigning the business to focus on key megatrends, Honeywell could become an exciting opportunity if its growth rate accelerates.
It could take time to play out. But Honeywell has been on the right side of history when it comes to predicting the increased importance of digitalization and data in the industrial world. We have yet to see Honeywell truly monetize this transition in a big way. But if it does, the stock could stage a breakout.
