Shares in Honeywell International (NYSE:HON) are currently trading at $94.39, up 3.31% YTD. The stock has underperformed the S&P500, which is up 6.37% year to date, but it has done quite a bit better than General Electric (NYSE:GE), its largest competitor, which is down 7.67% since the beginning of this year.
The company recently increased its FY2014 EPS guidance from a range of $5.40 - $5.55 to $5.45 - $5.55. This would be an increase of 8.7% to 11.7% compared to last year's earnings per share of $4.97. As we can see from the graph above, Honeywell's dividend hasn't grown at quite the same pace as its earnings per share. This has allowed the company to maintain a very low payout ratio of only 35.1% over the past 4 quarters. For comparison, GE's payout ratio in the most recent 12 months stands at 64.1%. Honeywell currently has a dividend yield of 1.91%, which is well below its 5 year average of 2.4%. Looking at Honeywell's valuations we can see the company is trading at 18.6 times TTM earnings, which is exactly the same as its 5 year average p/e ratio. General Electric is slightly cheaper at a p/e ratio of 17.7.
Over the past 12 months, Honeywell has spent $717 million in share repurchases, which is less than 1% of the current market cap of $73.77 billion.
Honeywell's earnings growth has been fueled by both growth in revenue and an increasing profit margin. In its 5 year plan, Honeywell states it plans to increase revenue to between $46 billion and $51 billion in fiscal year 2018. Combined with increasing margins, the company expects to see double digit earnings growth. This means the company should be more than able to continue its dividend increases. The 5 year dividend growth rate stands at 8.8%, and with double digit earnings growth expected, I would expect the dividend to continue growing at this pace or even higher.
Honeywell's current price to sales ratio stands at 1.9, which is far above its 5 year average of 1.3. However, with profit margins growing, and expected to grow even further, I'm not surprised to see an expansion in the company's p/s multiple. Revenues simply become more valuable when the profit margin goes up.
HON Current Ratio (Quarterly) data by YCharts
Not paying too much to its shareholders has allowed the company to save a very decent amount of money. Cash and equivalents currently stand at $6.58 billion, which is 8.9% of the company's market cap. The current ratio stands at 1.57, while the quick ratio is 1.04, implying good short term financial health. The long term debt is only $6.84 billion, which I consider to be very sustainable for a company of this size.
Honeywell has been growing its revenues at a decent pace, and expects to continue to do so. Combined with margin expansion, this should lead to earnings growth in the low double digits. For the next 5 years, average analyst EPS growth expectations for the company stand at 10.6%. The company has increased its dividend by an average of 8.8% over the past 5 years, and considering the great balance sheet health and already low payout ratio, I wouldn't be surprised to see the dividend growth rate go up. The current dividend yield of 1.91% isn't very impressive, but for investors looking for long term investment opportunities, such as myself, the growth in earnings and dividends makes this company a great buy.
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