Illinois Tool Works Is A Good Stock To Hold

Sep. 3.14 | About: Illinois Tool (ITW)


Illinois Tool Works announced a gigantic increase in dividends.

The Illinois 80/20 business model and enterprise initiative are working.

Illinois is a good stock to hold.

Illinois Tool Works (NYSE:ITW) recently announced a gigantic increase of 15% in its quarterly dividends. The company's third quarterly dividend of $0.485/share will take its annual dividend to $1.94/share. It has a 50-year history of making gigantic increases in its dividends without any interruption. Below table demonstrates this trend.













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The success story does not end here. During the past five years, its share price has surged by more than 113% on the back of its solid business model, smart strategic initiatives and strong financial performance. Illinois Tool Works 80/20 business model allowed the company to prosper in any business environment. The 80/20 business model means that the company will focus on the 20% of its business and products that are producing 80% of the value for the company. Also, the company will invest and focus less on the 80% of business that produces the 20% of value.

Illinois Tool Works is further enhancing its business and operational efficiencies by its enterprise initiatives which is categorized in three key points: business model simplification, strategic sourcing and portfolio management. With these enterprise initiatives, the company seeks to generate 200 basis points of organic growth, a pre-tax margin of above 20%, returns on invested capital of above 20% and a free cash flow conversion of above 100%.

The Illinois management is strongly and efficiently working on the company's business plans. Illinois is a manufacturer of a variety of industrial products & equipment. Their business segment includes industrial packaging, polymers & fluids, transportation, power systems & electronics, construction products and food equipment. The company is right concerning its business strategy because in the 2013 fiscal year, the company has generated a 13% growth in earnings per share. This is backed by its smart enterprise initiatives as operating earnings increased by 100 basis points to around 17%.

The company continues to work on its portfolio management; business simplification and strategic sourcing which improved its performance in the first half of 2014. In the latest quarter, the company's earnings per share increased by 32% to $1.21/share. This strong growth in earnings was due to the massive increase of 300 basis points in its operating margins. Cumulatively, all its business segments have shown organic growth, margin expansion and growth in the American and Chinese markets. In the coming days, Illinois expects to generate earnings of around $4.50 to $4.62/share as compared to $3.74/share. I believe the company will achieve its targeted goals especially with the focus on key markets and products along with enhanced operational efficiencies.

Having a look at the cash side will reveal more facts about the company's ability to invest in future growth opportunities and to return cash to investors. In the latest quarter, it had generated $573M in operating cash flows while the capital investments were at only $78M. Thus, the free cash flow came at $495M. Its free cash flow conversion rate is very high and those free cash flows are high enough to cover the dividend payments of only $174M. The huge gap in free cash flows and dividends offered the room for the latest 15% increase in dividends. Additionally, I believe the company has the potential to sustain the dividends. Its initiative to buy back outstanding shares will further enhance its earnings per share and dividends.

Before making any conclusion, we have to consider any risks associated with Illinois Tool Works. Illinois is operating in the diversified industrial industry whose businesses are directly related to the economic environment. Presently, the global economic growth is recovering and will continue to do so in the coming days as based on reports from the International Monetary Fund. Therefore, I expect Illinois to keep its momentum in the coming days. On the other hand, the company seems to be in sound financial and cash positions. Henceforth, I do not expect any financial crises for the company.

In Conclusion

The company has set strong footholds for future growth as evidenced by its strong business model and smart business strategies. Its enterprise initiatives are producing very strong margin growth for the company along with the enhanced operational efficiencies. Its latest dividend increase signifies that the company's management is strongly confident in its growth prospects. I believe Illinois is a good stock to hold for big gains.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.