Publicly traded industrials comprised the majority of companies traded on the first stock markets. Back then, they were the most valuable companies on the planet. But many of these first industrial behemoths have come and gone or are smaller segments of larger conglomerates. After General Electric's departure in 2018, none of the original 12 companies in the Dow Jones Industrial Average (DJIA) are still in the index.
Times have changed. In terms of value, the largest U.S. technology stock by market capitalization, Apple, is worth nearly 15 times as much as the largest U.S. industrial stock by market capitalization, Honeywell (HON -0.09%). Technology is now the largest sector in the stock market, but there are a handful of industrial stocks that offer the golden combination of growth, income, and market-beating returns. Honeywell is arguably the best at this. There's a reason it's the most valuable U.S. industrial stock, and it could very well remain a leader for decades to come. Here's why.
The makings of an industrial behemoth
This year marks Honeywell's 100th anniversary on the New York Stock Exchange. The company was also added back into the DJIA in late August after being kicked out in 2008.
Honeywell has an excellent track record for beating the market. It consistently outperformed the S&P 500 over the past year, three years, five years, and 10 years. It also tripled its dividend over the past 10 years.
For most of the last 100 years, Honeywell was inventing and manufacturing products, systems, and components. There's a good chance you have a Honeywell thermostat or fan in your house, have flown in a plane that relies on Honeywell's components, and receive packages from a distribution center that uses Honeywell's technology.
The scale and scope of Honeywell's products and technologies is hard to fathom. Lucky for us, Honeywell recently quantified some of its domains during its Leadership Webcast for Investors. According to the company, "Honeywell's installed base of systems, software, and technologies are used in" roughly 50 of the top 100 internet retail distribution centers, 90% of biodegradable detergents, 70% of Fortune 500 companies, 10 million out of 17 million buildings around the world, 80% of approximately 3,000 satellites, 35 global industries, 50% of U.S. hospitals, 84% of the top 25 global food retailers, 11,000 industrial plants, 50% of global renewable fuel, 70% of the 38,000 or so business and general aviation aircraft, and 90% of the 27,000 or so transport aircraft. Oh, and it has the first commercialized renewable jet fuel and the world's most powerful quantum computer. So yeah, it does a lot.
The next 100 years
That basically describes the last 100 years of Honeywell. Going forward, Honeywell is focused on expanding into new fields like renewable fuels, quantum computing, solar, electric propulsion instead of diesel propulsion, and more. But no matter what the field is, the focus is all centered around one word: connectivity.
Honeywell doesn't just want to make thermostats, it wants to create "smart buildings" that are safer and use fewer resources, energy, and water. Instead of just making products, it's creating operational technology (OT). Unlike information technology (IT), which essentially manages data in the digital world, OT connects and controls the physical world -- Honeywell's world.
The next step in OT is the industrial internet of things (IIOT). IIOT is all about digital transformation in the industrial sector to make equipment and processes run more efficiently. This is done by digitalizing everything from components on an airplane to equipment in an oilfield to maximize uptime and safety (using what's called predictive analytics). It also relates to manufacturing. For example, Honeywell's Fast Track Automation speeds up the manufacturing and rollout of solutions in the life sciences industry. While companies like Pfizer or Moderna may invent a vaccine, Honeywell could be involved in automating aspects of the production process to mass-produce the vaccine as quickly as possible.
Honeywell Forge is the company's big push into IIOT. It sees a $100 billion total addressable market in software as a service (SaaS) for industrial companies by implementing autonomous solutions, collecting and automatically processing data, and connecting equipment.
With the world becoming more and more connected, the move makes sense. But the reality is there aren't a lot of companies with the track record and experience necessary to become a leader in this new field. And since Honeywell is the manufacturer of a lot of industrial equipment and technology, it's better suited to build digital solutions that actually work than a pure-play software company with little to no industrial experience. Honeywell expects double-digit recurring software sales growth with similar profit margins to its existing business.
An industrial behemoth that's here to stay
Industrial behemoth means something different now than it did 50 years ago. And it will likely mean something different in 2070. Looking at the industrial companies of today, there are few that come close to Honeywell's current success and upside for future success. Its outperformance, strong earnings, industry-leading balance sheet, and stable and growing dividend combined with the idea that it is willing to take risks in new industries and gain a first-mover advantage into IIOT make Honeywell a dependable stock.
Honeywell is trading near an all-time high, and arguably, is a little pricey right now. It remains a good long-term buy, but it's OK not to jump in now. At the very least, consider putting Honeywell on your watchlist.