Honeywell International (HON 1.66%) is one of the largest industrial companies in the S&P 500. The company's balance sheet, its diverse business model, and a dividend yield that is now nearly 3% make Honeywell an attractive option -- on paper. Yet as with many large industrial companies, its processes and sales are profoundly affected by the novel coronavirus pandemic. Determining Honeywell's resilience from a financial perspective, as well as the fundamental strength of each of its core business segments, should help clarify just how severe its predicament is during this challenging time, and how attractive its stock is over the long term.
Honeywell's business
Honeywell manufactures and maintains a slew of industrial and household products and software. The company is a global technology leader and a pioneer in everything from cybersecurity to onboard vibration monitoring systems. Honeywell Forge is its new and improved big data and machine learning platform, which traverses its suite of business segments, including aerospace and defense, building technologies, safety and productivity solutions, performance materials and technologies, and Honeywell Connected Enterprise. Honeywell also licenses its brand name to retail products made by other manufacturers, like thermostats, sensors, alarm systems, heaters, fans, home generators, paper shredders, air conditioners, and more. It's likely you have Honeywell products in your home and have been exposed to them on countless occasions.
Image source: Getty Images.
Honeywell's largest industry by revenue is its aerospace and defense segment, which produces software solutions like the aforementioned Honeywell Forge for commercial airlines, technology for Mars landers, navigation equipment, and everything in between. Although earnings for its aerospace division will certainly deteriorate amid the pandemic, it's important to understand that Honeywell isn't as vulnerable to the collapse of commercial air travel as aircraft manufacturers or airlines. Yet a slowing economy and oil below $30 will certainly take a toll on Honeywell's construction business and Honeywell UOP, which mainly supports the downstream sector of the oil and gas industry. Across all of its businesses, manufacturing could slow as factories shut down to reduce the spread of the coronavirus. Simply put, Honeywell's business will take a hit, but only certain parts of its diverse stream of revenue will be severely impacted.
Financial and dividend health
HON Free Cash Flow (Quarterly) data by YCharts
As unemployment rises and small businesses close, cash becomes coveted. During the boom times of high-flying economies, overspending sourced from debt is common. Even during such booms, Honeywell has done a good job keeping its balance sheet in check, all the while increasing dividend payments every year for the last 20 years thanks to strong free cash flow (FCF). As its dividend payment has more than quadrupled since the year 2000, Honeywell's FCF has continued to rise and now well exceeds dividend obligations. Theoretically, FCF could fall by 50% or more and Honeywell could still pay its dividend with cash. That mattered even in pre-coronavirus times because many industrials, and especially energy companies, have large dividend obligations that absorb the majority of FCF. During a time of declining revenue, which we are likely to see in the coming few quarters, the consequences are amplified. Dividend obligations can quickly exceed FCF, forcing such companies to turn to the debt markets or cut their dividends. Income investors can rest assured knowing that Honeywell's dividend is just about as solid as it gets for an industrial.
HON Financial Debt to Equity (Quarterly) data by YCharts
Honeywell has very little debt compared to other large industrial and energy companies. Its financial debt to equity (D/E) is a mere 0.13, signaling Honeywell's core business has a low risk of loan default or bankruptcy. Debt to capital (D/C), even more than simply the net long-term debt or D/E, is a great way to determine how financially leveraged a company is. Honeywell's 46% D/C ratio is a little higher than in years past, but it's strong for an industrial company. For reference, Honeywell and Siemens are nearly tied for the least financially leveraged companies out of the largest 10 industrials.
HON Debt To Capital (Quarterly) data by YCharts
A long-term favorite
Honeywell is one of those companies that boom when the economy is roaring without going bust when things head south. Its exposure to so many industrial and residential products, services, and solutions, along with a rock-solid balance sheet, makes it one of the premier industrials to own.
In less than two months, the coronavirus pandemic subjected Honeywell's stock to a 45% haircut, but in the last week, the stock has made up about half of that loss. This one-week 35% rebound from its 52-week low may deter some value investors from investing, which is a healthy skepticism given that the ripple effects from the coronavirus have only just begun. Based on fundamentals, Honeywell's stock is still a reasonable price, but it's not as glaringly cheap anymore because the company hasn't reported a coronavirus-affected quarter yet. That being said, Honeywell is a fantastic company that deserves a spot on every watch list, because when it does go on sale, it's one you want to buy.
