- Diversified industrials are seeing momentum with growth in the economy.
- Honeywell’s business strategy is working for the company, and is setting strong footprints with acquisitions and product innovation.
- Honeywell is a strong pick for defensive investors.
Diversified industrial companies have been holding strong over the past two years with growth in the economic environment. The business of these companies is dependent on the economic environment as was witnessed during the Great Depression. Diversified industrial companies were among multiple industries affected by the economic downturn then and recently. The entire industry lost its value and generated a negative return of 44% in 2008. Nevertheless, these companies took the downturn as an opportunity to restructure their business by focusing on their core products. As a result, they are now making acquisitions and dispositions, working on cost-cutting and producing innovative products.
Over the past two and a half years, since the global economy started showing signs of recovery, these companies have had strong momentum and have been generating massive profits. These companies have strong business models and global exposure, which allow them to achieve strong top- and bottom-line growth. In this article, I pick one of the best companies, Honeywell International Inc (HON), to see where it stands in these circumstances. I will look at its business strategy, future prospects and financial situation to gauge either it is a perfect stock for defensive investors with low risk and high rewards.
How Honeywell is a Safe Investment?
Rev Growth (3 Yr Avg)
Net Income Growth (3 Yr Avg)
Operating Margin % TTM
Net Margin % TTM
Honeywell has been generating strong growth over the past three years as demonstrated in the above table. Its continued investment in growth opportunities, global expansion and ability to introduce new innovative products led it to generate excellent results. Honeywell is a technology and manufacturing company. It operates in four business segments including Aerospace, Automation and Control Solutions, Performance Materials and Technologies and transportation systems. All four business segments are generating strong growth for the company.
In 2013, its aerospace segment has generated flat growth, but margin expansion was stronger. The Automation and Control Solutions segment has produced 4% growth and 9% growth in segment profit. The Performance Materials and Technologies segment has generated 9% growth, and Transportation segment has provided the company with 5% growth in sales. On a consolidated basis, its revenue growth was at 4%. However, with solid margin expansion, it has posted 33% growth in earnings per share.
Looking forward, the company is looking to produce mid single digit growth in revenues and double digit growth in earnings. On top, recently, Honeywell announced its five-year goals. Every year until 2018, Honeywell is expecting to generate double digit growth in earnings. Further, it is looking to double its cash flows as well. To do this, it is expecting to invest more than $10 billion on strategic acquisitions that will add nearly $5 to $10 billion in revenues. Further, it will continue to invest to produce innovative products and will continue to generate strong growth with its recent additions to product portfolio.
The maturity of its key process enablers - Velocity Product Development (VPD), the Honeywell Operating System (HOS), Functional Transformation (FT) and at the moment the Honeywell User Experience (HUE) all providing revenue and margin growth well into the future. The company products like Honeywell's Wi-Fi Smart Thermostat with voice control and cloud-based voice control solutions are generating solid organic growth for the company. Further, it has been experiencing strong acceleration in the commercial aftermarket ESS, Turbo and Advanced Materials. All this suggests a modest improvement in end market conditions. At the end of last year, its ASS solutions order backlog was at double digits and defense backlog was up around 20%.
Ability to Sustain Returns
With a smart investment strategy and solid financial performance, Honeywell has been able to enhance investor confidence over the years. The company's stock price surged nearly 191%, and dividend growth is at 45%. I believe the company has more promising days to come in the next five years as it is looking to generate double digit growth in earnings each year.
Over the past three years, it has increased quarterly dividends by 45%. Recently, it increased the quarterly dividend to $0.45/share which takes it annual dividend to $1.80. Its strong cash generating potential allowed it to make massive increases in dividends. Its free cash flows are twice than its dividend payments. In 2013, it has generated around $3.3 billion in free cash flows and only paid $1.3 billion in dividends. This big gap offers a lot of room for future increases. Further, the company is continuously working on a buyback program which is further enhancing its dividend and share price. Its payout ratio based on income of only 33% is not only manageable but also offers potential for more increases in the coming days.
Going forward, as the company is looking to generate double digit growth in earnings and nearly doubling its cash flows, I expect dividends to double in the coming five years. With all these positives, I expect the share price to keep up its upward trend. Its continued buyback program will also enhance both share price and dividends.
Honeywell's strong product portfolio and solid footprints in global markets will keep allowing it to entice investors. The company's continued investment in growth opportunities including strategic acquisitions will lead it to produce double digit growth. Its dividends are completely safe, and the company has full potential to double them in the coming five years. I believe trading at 18 times to earnings, Honeywell is still a good pick for defensive investors, and it is set to generate big profits for investors in the coming days.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.