It takes specialized equipment for industrial companies to manufacture their products, and Illinois Tool Works (ITW 0.88%) provides much of the equipment its customers need to further their own business interests. With a wide variety of applications ranging from advanced polymers for wind turbines to smarter packaging for consumer-goods and innovative automotive components, Illinois Tool Works plays an important role in many different industries. The company also has a strong history of treating its shareholders well by paying rising dividends, and dividend investors looking at the stock for the first time want to know if that performance can continue.
Let's take a closer look at Illinois Tool Works to see whether investors can be confident in its ability to keep its dividend moving higher.
Dividend stats on Illinois Tool Works
|
Current Quarterly Dividend Per Share |
$0.78 |
|
Current Yield |
2.3% |
|
Number of Consecutive Years With Dividend Increases |
43 years |
|
Payout Ratio |
50% |
|
Last Increase |
September 2017 |
Data source: Yahoo! Finance. Last increase refers to ex-dividend date.
Dividend yield
Illinois Tool Works has a current dividend yield of 2.3%, which is slightly higher than the average for the broader S&P 500 index. That puts the company in a sweet spot for many investors, in that it pays a healthy amount of income without having such a high yield that it raises concerns about its sustainability. Illinois Tool Works' current yield is toward the bottom end of its traditional range, which has generally been between around 2% and 4% over the past decade. An extremely sharp rise in the company's share price is primarily responsible for the yield decline, and recent measures to boost the dividend at a faster pace haven't yet caught up to the stock's performance.
Image source: Illinois Tool Works.
Payout ratio
Illinois Tool Works has maintained a fairly conservative dividend policy, with its current payout ratio of roughly 50% of earnings near the high end of its recent range. Illinois Tool Works has typically paid out between 30% and 40% of its earnings as dividends during the 2010s, retaining enough capital to employ for other purposes as well. When you look at near-term expectations for its bottom line, Illinois Tool Works' payout ratio looks poised to drop back toward that 30% to 40% range over the next year or two, providing considerable security to those who might fear a future decline.
Dividend growth
Illinois Tool Works has put together an impressive history of dividend growth. For 43 consecutive years, the company has boosted what it pays shareholders annually. The Dividend Aristocrat also hasn't coasted on its past performance, with its most recently announced 20% dividend increase reflecting the considerable success the company has enjoyed. As Illinois Tool Works has been able to expand its business, its dividend has seen growth accelerate, demonstrating the company's commitment to sharing its wealth with its investors.
ITW Dividend data by YCharts.
What's happened with Illinois Tool Works lately?
Illinois Tool Works has experienced good conditions and taken advantage of them appropriately. The automotive original equipment manufacturing segment has been a key driver of organic growth for Illinois Tool Works in recent years, and other segments such as food equipment, construction products, and specialty products have also contributed to overall sales gains. The machinery specialist has used its strategy of seeking out the highest-growth businesses in each of its segments as a driver of internal efficiency improvement efforts, looking to restructure its segment operations to focus on its best prospects for profit.
Illinois Tool Works is vulnerable to cyclical downturns, however, and the company expects to experience one in the current quarter. Volatility in automotive manufacturing volume can introduce considerable choppiness in Illinois Tool Works' results. Yet even though the growth rates in the third quarter could slow, management is optimistic about a pick-up in the fourth quarter to close out the year.
What to expect from Illinois Tool Works
Illinois Tool Works has benefited from a long expansion in the U.S. economy, and investors have to hope that will continue. The company has taken on additional debt to take advantage of low interest rates and finance expansion, and some worry that in the next downturn, that debt could weigh on performance. Yet Illinois Tool Works has ample earnings and cash flow to divert toward debt reduction without affecting the dividend, and that leaves the company's payout looking safe for the foreseeable future.
