Honeywell's Buyback Program Is A Powerful Catalyst For Its Stock

Summary

• Honeywell has been accelerating its buyback program in the past four years. I expect this to continue.
• As a result, its share count has been reduced by over 10% in the past 10 years. In fact, in the past 5 years, the share count has fallen by 9%.
• Honeywell has plenty of cash flow to continue doing this. Its FCF yield is over 5%, and up to 70% of that is used for buybacks.
• Based on this, the stock is at least 16% undervalued, or worth $187.50 per share.
• This idea was discussed in more depth with members of my private investing community, Total Yield Value Guide. Get started today »

Honeywell's Buyback Program Is A Major Catalyst for Its Stock

Honeywell International, Inc. (NYSE:NASDAQ:HON) is in the middle of a $10 billion buyback program authorized by its board. As of December 31, 2019, there was still $7 billion left in that program. Since HON stock has a $115 billion market value, this represents 6% of its total market capitalization.

This has produced great results for the company. For one, the share count has fallen over 10% in the past 10 years. You can see this in the chart below:

(Source: Hake)

This includes my estimate for the share count drop this year. What is most interesting is from this chart is that the company has been accelerating its share count reduction in the past five years. From 2014 to the end of 2019, the number of shares outstanding has been cut by 9.0%.

Honeywell certainly has the FCF to do this. Its FCF has been accelerating, as well as the portion allocated to buybacks. You can see this in the two charts below that I have put together:

(Source: Hake)

This clearly shows that the amount of money the company dedicated to buybacks is increasing, both in dollar terms and as a proportion of its FCF.

In Honeywell's earnings press release, management said that its base case goal for the share buyback program is a reduction of at least 1% every year in its share count. So far, the company has well exceeded that in the past five years.

As A Result, Its Dividends Per Share Have Increased

The growth in Honeywell's dividends per share has been much faster than its cost for those dividends. This is a direct result of the company's buyback program.

You can see this in the tables below.

(Source: Hake)

This shows that the Dividend Per Share ("DPS") has grown 220% in the past 10 years, from $1.15 per share to $3.69 estimated for 2020. This compares to a 173% increase in the 10-year cost of dividends to Honeywell. Even including the 10-year period ending 2019, the cost was up 159% but the DPS rose by 192%.

The same thing happened in the past five years. For example, dividends per share rose by 64% to the end of 2019, but the cost was up only 41.5%.

Both of these results are due to the fact that the share count was lowered, as I pointed out above.

So this means that the buybacks have been successful in returning value to shareholders.

What is Honeywell Stock Worth?

Based on this analysis, we can estimate the value of Honeywell stock. One simple way to do this is to estimate its free cash flow as a percent of the market value and then divide it by the new lower estimated number of shares that will be outstanding.

For example, the company recently gave a forecast of its free cash flow for 2020. Honeywell said in the earnings release that it would be between $5.7 billion and $6.2 billion for 2020. My estimate, based on the FCF margin, is that FCF will be slightly over $6 billion for 2020. In two years, I estimate it will be up 10% over that amount, or $6.6 billion.

Therefore, we can estimate the true value of Honeywell stock:

(Source: Hake estimates)

I estimate that there will be 675.5 million shares outstanding. The result is the true value is $187.22 per share, or 16% above today's price.

Summary and Conclusion

The fact is Honeywell stock is quite cheap here. You can see this in the table below:

(Source: Hake)

The stock has a total yield, including dividend yield and buyback yield of over 6%. Based on my estimate of FCF in two years, the stock is likely 16% undervalued, at $187.22 per share.

This is based on its buyback and share reduction program continuing at the same pace that it has been over the past several years. Now that the stock is even cheaper than the beginning of 2020, I believe the company may be increasing its buybacks. Look for good things to happen with HON stock and the dividend per share as a result.

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Analyst’s Disclosure: I/we 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.