The classical rationale for investing in an industrial conglomerate was that the diversity across its end markets provided growth across various market conditions. That argument still applies, particularly for a high-quality business like Honeywell (HON +2.31%).
While its businesses aren't all in growth mode right now (they rarely will be for a conglomerate), they're all strong businesses with plenty of long-term growth potential. As such, the potential for substantial dividend growth (current yield of 2%) and capital appreciation at Honeywell looks good.
How Honeywell is shaping up for 2023
A quick look at the company's segmental growth guidance for 2023 reveals a lot about its potential to grow through various economic outcomes.
Overall, management expects 2%-5% organic sales growth in 2023, with margin expansion leading to adjusted earnings per share (EPS) of $8.80-$9.20, compared to $8.76 in 2022. Free cash flow was $5.1 billion to $5.5 billion, excluding the impact of one-off settlements, compared to $4.9 billion in 2022.
The critical point here is that while there's weakness in its short-cycle end markets in safety and productivity solutions (SPS) and Honeywell building technologies (HBT) -- a function of the slowing economy reducing demand for data-gathering solutions, e-commerce warehouse automation, and private investment in commercial construction -- it's more than offset with growth in other areas. In particular, the aerospace market is set for solid growth as commercial flight departures improve and airplane manufacturers like Boeing ramp up production. Meanwhile, ongoing investment in refining capacity and LNG will help the performance, materials, and technologies (PMT) segment.
|
Honeywell Guidance |
Organic Sales Growth Guidance for 2023 |
Notes |
|---|---|---|
|
Aerospace |
high-single digits to low-double digits |
Ongoing strength in the commercial original equipment market and commercial aftermarket, an easing of supply chain issues encouraging a return to growth in defense and space |
|
Honeywell building technologies (HBT) |
low-single digits |
Pressure on nonresidential construction from higher interest rates, balanced by ongoing spending on sustainability and executing on its backlog. |
|
Performance materials and technologies (PMT) |
mid-single digits |
Relatively high energy price support refining catalyst and process automation sales. Ongoing strength in sustainable technology sales. |
|
Safety and productivity solutions (SPS) |
a high-single digit decrease to a mid-single digit decrease |
Deterioration in warehouse automation and productivity solutions, growth in sensing technologies |
Data source: Honeywell presentations.
Honeywell's long-term growth prospects
The discussion above centers on where Honeywell is now and the outlook for 2023, but it's the long term that counts for passive investors who want a stream of income over the years. There's good news here, too, because the industrial company has a rock-solid balance sheet enabling it to invest in growth industries.
Of particular note, Honeywell has a 54% stake in quantum-computing company Quantinuum, which it believes will be positioned in a $1 trillion industry in the coming decades. Its sustainable technology solutions (STS) businesses -- referred to in the PMT segment in the table above -- remain on track to generate $700 million in revenue in 2024 from just $200 million in 2021. They include sustainable aviation fuels, carbon-capture technology, and renewable energy storage solutions.
Honeywell also has a host of technologies in development, including avionics and propulsion systems for unmanned aerial mobility (urban air taxis, etc.) and unmanned aerial systems (drones).
One market of its success in introducing new technologies comes through its new product introduction vitality index, which measures "total sales generated from organically developed new products introduced in the last three years" in percentage terms. It's risen from 21% in 2017 to an estimated 33% in 2023.
A stock to buy
All told, Honeywell offers investors exposure to diversified end markets, a strong balance sheet, and a company with plenty of long-term growth potential. It's a perfect combination for dividend appreciation over the coming years. If you want a stock that can grow its dividend over time, then you will need to be invested in a company with long-term earnings and cash flow growth potential.
That's what Honeywell's mix of businesses offers. As such, it's a great option for investors looking for passive income.
