Please ensure Javascript is enabled for purposes of website accessibility

Will Honeywell Raise Its Dividend in 2016?

By Travis Hoium - Jan 27, 2016 at 2:32PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

A dividend increase may be the best Honeywell investors can hope for this year.

When you think of growth companies, Honeywell (HON 1.19%) probably isn't on the top of your list. The industrial company has seen revenue stagnate over the last few years, and it can't seem to find any new growth markets out of its core controls and aircraft business.

But little revenue growth doesn't mean Honeywell hasn't been able to dramatically improve its bottom line recently. As you can see below, net income is up 164% in the past decade, and with more margin expansion programs in place, we could see further earnings growth in 2016. Does that mean a higher dividend will follow?

HON Revenue (TTM) Chart

HON Revenue (TTM) data by YCharts.

Bottom-line growth is the best hope
In 2016, management is expecting sales to grow 4%-6% to $39.9 billion-$40.9 billion. That's decent growth, but consider that sales were $40.3 billion in 2014, so the company is essentially running in place on the top line. Even the growth this year comes with some caveats, because the company spent $5.5 billion to acquire companies over the last year. 

The real growth will once again be on margins. Segment margins are expected to grow from 18.8% in 2015 to between 18.9% and 19.3% in 2016. That will help drive an 8% to 13% increase in free cash flow to $4.6 billion-$4.8 billion.

Margin expansion has been Honeywell's one tool to grow the bottom line over the past five years. But that lever can only be pulled so far, and I'm not sure how much longer the same will work for investors. For the dividend, that's fine -- but long term, the company needs more avenues for growth.

Can Honeywell pay a higher dividend?
If you look at the chart below, you can see that Honeywell has plenty of room to grow its dividend in 2016, and that it will probably do so. Even a dividend payout ratio of 50% of earnings wouldn't be out of line, so there's plenty of room for dividend growth.

HON Dividends Paid (TTM) Chart

HON Dividends Paid (TTM) data by YCharts.

The problem with paying too much in a dividend is that Honeywell is spending billions on acquisitions to fuel what little growth it has. It's spent $5.5 billion since July, and there could be billions more in acquisitions this year.

Honeywell's dividend is likely heading higher, but that doesn't mean the stock is a great buy for investors. Sales are stagnant, the easy margin expansion opportunities have been exploited, and now management has to count on M&A for growth. That's not a great path for a large industrial company to be on, and I would be wary of Honeywell in 2016.

Travis Hoium has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Honeywell International Inc. Stock Quote
Honeywell International Inc.
HON
$200.87 (1.19%) $2.36

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
400%
 
S&P 500 Returns
128%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/15/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.