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By Mark Bern, CPA CFA

Illinois Tool Works (NYSE:ITW) manufactures industrial products on a global scale and derives more than 50% of revenue from outside the U.S. Examples of some of ITW's products include: fasteners, welding equipment, commercial dishwashers, machinery and related consumables for the automotive, construction, food, and general industrial markets. The company has about 850 business units in 57 countries.

The company has increased its dividend an average of 11% per year over the past 5 years and has increased its dividend for 48 consecutive years. To put it into perspective, the dividend in 2001 was $0.41 compared to $1.38 in 2011. Had you held the company for the past 10 years you would now be receiving 137% more in dividends than you did when you bought the stock. I call that a good track record. The dividend is currently yielding 2.6% and the likely increases should more than keep up with inflation.

There are a lot of things to like about ITW, but my favorite, besides the dividend record, is the company's earnings record. Earnings per share have dipped in only two years and have rebounded nicely each time. In 2007, earnings per share fell from $3.36 per share to $3.05 per share in 2008 and $1.93 per share in 2009 then rose to $3.03 per share in 2010 and I expect per share earnings of $3.75 in 2011. The dip in 2001 was much less severe and lasted only one year; then earnings bounced right back in 2002. My point is that this is a well-managed company that adjusts to its environment to remain profitable and resume its growth trend even when many other companies continue to struggle.

The company has a debt to total capital ratio of 26%, which is very manageable and provides the company with flexibility to invest in internal growth and acquisitions when opportunities arise. The net profit margin is about 10% and the return on total capital is 14.5%, both of which exceed the industry averages of 8.7% and 12.0%, respectively. The payout ratio is only about 37%, so the dividend is well covered. The company should be able to grow earnings per share at about a 10% per year average.

The company appears to be fairly valued at the current price of $55.44 per share (as of the close on Wednesday, February 15, 2012). The first quarter of 2012 looks like it may be a bit challenging for most companies and guidance is generally flat for earnings compared to the 1st quarter of 2011. ITW should do better than the broader market, but stocks in general look like they could use a breather. If you own ITW I would recommend holding onto shares of this great company. If you are considering buying a new position in ITW or adding more shares to an existing position, I would recommend being patient as I believe you should be able to get in at a better price by earnings season for the second quarter. My target price for ITW is $50 or below. If the stock price drops as far as $45, I would consider the stock a strong buy.

If you are like me and would rather not have cash sitting in an account collect little more than dust, I would recommend selling the June 2012 put option with a strike price of $52.50 and collect the premium of $2.30. If the stock price remains above the strike price I would keep the premium, net of commissions for a profit of $221 or return on the $5,250 I would need to hold in my account to secure the puts of about 4.2%. That isn't a bad return for four months. On the other hand, if the stock does drop and the option gets exercised I would be obligated to purchase 100 shares of ITW for each contract I has sold and would have a tax cost basis of $50.20. My actual cost basis, including commissions and exercise fee, would be $50.44. My effective dividend yield would then rise to 2.8%. Either way, I like the outcome. Good luck in your investing decisions. As always I like hearing from readers about their experiences with owning this stock.

Source: Searching For Rising Dividends: Illinois Tool Works