Honeywell (HON +2.81%) is a technology and manufacturing conglomerate with a long history of delivering innovative products and services to a wide range of industries. The company's stock has been a solid performer in recent years, handily surpassing the returns of the Dow Jones Industrial Average over the past three-, five-, and 10-year periods, thanks in part to its strong pricing power, expanding profit margins, and diversified business portfolio.
As much as Honeywell investors have benefited from its strong capital appreciation over the years, they haven't fared all that badly with its dividend policy, either. Honeywell has made a dividend payment for 61 years while increasing the payout for 13 consecutive years.
Although the dividend has jumped by more than 11% annually on average for the past decade, in more recent periods since the start of the pandemic the payout has been raised by lower percentages, though it still yields a respectable 1.9% annually. Here's why this conglomerate deserves to be on your buy list.
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Pricing in growth
One key factor driving Honeywell's financial performance has been its pricing power, or its ability to charge higher prices for its products and services without losing market share.
This has been a key driver of Honeywell's revenue growth in recent years, as the company has been able to pass on price increases to its customers while still maintaining strong demand for its products and services. This pricing power has helped Honeywell to consistently generate strong profits, even during times of economic uncertainty.
For example, safety and productivity solutions, which manufactures personal protective equipment, apparel, footwear, and gear, saw margins rise 250 basis points to 15.7% in the quarter, its highest level since the fourth quarter of 2018.
Yet it's been an across-the-board situation, including in building technologies and performance materials, both of which also have strong pricing tailwinds. CFO Greg Lewis told analysts that while its possible pricing could be impacted if commodities deflation continues, "I mean across a massive portfolio like we have...we do expect positive pricing next year."
Honeywell also has a demonstrated its ability to significantly expand profit margins through a combination of cost-cutting measures and efficiency improvements. Pricing and cost controls are expected to drive adjusted margins to expand 170 to 210 basis points in the fourth quarter and 90 to 110 basis points for the full year.
The industrial giant is also focused on developing and selling high-margin products and services. For example, Honeywell's building technologies division has experienced strong growth in recent years due to the increasing demand for smart building solutions where it predicts double-digit organic sales growth for the segment this year.
The building products portfolio saw organic sales increase 23% overall in the third quarter, the third consecutive quarter of double-digit growth. Building technologies enjoyed 19% growth for the period and was honeywell's fastest growing segment.
NASDAQ: HON
Key Data Points
Its portfolio is also diversified across a number of key industries, such as aerospace where it is a leading supplier of products and services including aircraft engines, avionics, and cockpit systems; and in energy, where it has a strong presence in the oil and gas sector, as well as in renewables.
Honeywell is also making significant investments in sustainable technology to help reduce energy consumption and greenhouse gas emissions, including the development of energy-efficient heating, ventilation, and air conditioning (HVAC) systems, as well as advanced energy management software. These investments have helped Honeywell tap into growing demand for environmentally friendly products and services.
In October, Honeywell announced a new ethanol-to-jet fuel processing technology that allows ethanol-based feedstock to be converted into sustainable aviation fuel, the traditional feedstocks for which tend to be limited. It's also looking for the recently passed Inflation Reduction Act to spur new investments in carbon capture technologies.
Such innovations are helping to position the company as a leader in the sustainable technology space.
A quantum leap in opportunity
Arguably one of the most exciting growth areas for Honeywell is its quantum computing business. Quantum computers are designed to perform certain tasks much faster than traditional computers, and Honeywell is at the forefront of this emerging technology. The company has made significant investments in quantum computing research and development and is now seeing the benefits of these efforts.
It merged its quantum computing unit with the quantum software outfit Cambridge Quantum a year ago to create the new company Quantinuum, though it continues to position the new business for an eventual spinoff as a stand-alone business within the next 18 months or so, market conditions permitting.
Image source: Getty Images.
Quantinuum is already being used in a range of applications, including pharmaceutical research, financial modeling, and materials science.
This is an exciting and potentially lucrative new business for Honeywell; it is well-positioned to reward shareholders as it capitalizes on the growing demand for quantum computing solutions.
A conglomerate worth the sum of its parts
Overall, Honeywell is a strong and diversified company that is uniquely positioned for success in a variety of industries. Its strong pricing power, profit margin expansion, and investments in sustainable technology and quantum computing make it a compelling investment opportunity, one that is developing a track record for rewarding shareholders as its business grows.
For those investors looking to add a high-quality technology growth stock to their portfolio, where they can enjoy both capital appreciation and steady income, Honeywell may just be the business to buy.
