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Illinois Tool Works Inc. (ITW): A Dividend Aristocrat With Double-Digit Dividend Growth

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Illinois Tool Works Inc. (NYSE:ITW) is one of the strongest, most diversified industrial conglomerates a dividend growth investor can find. While the stock only yields 2.4% today, the company raised its dividend by 13% last quarter and continued double-digit dividend growth isn’t out of the question.

ITW Dividend

During the third quarter, ITW registered a decline in sentiment among the funds tracked by Insider Monkey. A total of 31 funds reported stakes with a total value of $934.51 million at the end of September, versus 38 investors holding $1.05 billion worth of shares a quarter earlier. Ken Griffin’s Citadel Investments Group and Ric Dillon’s Diamond Hill Capital held around 3.83 million shares and 2.06 million shares, respectively, at the end of the third quarter.

ITW possesses many of the characteristics we look for when accumulating stocks in our Top 20 Dividend Stocks portfolio. Let’s take a closer look at the business.

Business Overview

ITW was founded over 100 years ago and has grown into an extremely diversified manufacturer of specialized industrial and consumer equipment and consumables with a presence in many different end markets – automotive, construction, manufacturing, food & beverage, and more. The company estimates that around 60% of revenue comes from consumer-facing businesses with the remaining 40% coming from industrial-facing businesses.

ITW consists of hundreds of businesses it has acquired over the years. It runs a unique decentralized operating structure that empowers acquired businesses to maintain most of their culture and operations while taking advantage of ITW’s resources to better serve their customers’ needs. The company’s business model also emphasizes the 80/20 rule, encouraging each business to focus on the 20% of its customers that generate 80% of its revenues and structure its operations around growing these key relationships.

By geography, ITW generates 50% of its sales in North America, 30% in Europe, the Middle East and Africa, and 20% in Asia. The company does business in over 50 countries, but its emerging market exposure is fairly limited.

Segments:

Automotive OEM (19% of sales, 24.5% margin): produces plastic and metal components, fasteners, and assemblies primarily for automotive original equipment manufacturers.

Test & Measurement (14% of sales, 16% margin): sells equipment, consumables, and related software for testing and measurement of materials and structures, as well as equipment and consumables used in the production of electronic subassemblies and microelectronics.

Food Equipment (16% of sales, 24% margin): produces commercial food equipment and related services, including warewashing equipment, cooking equipment (e.g. ovens, broilers), refrigeration equipment, and more. Customers include restaurants and food retail markets.

Polymers & Fluids (13% of sales, 20% margin): sells adhesives, sealants, lubrication, fluids, and polymers for auto aftermarket maintenance and appearance.

Welding (12% of sales, 25.5% margin): sells welding equipment, consumables, and accessories for a wide array of industrial and commercial applications.

Construction Products (12% of sales, 20% margin): produces construction fastening systems and truss products used primarily in construction markets.

Specialty Products (14% of sales, 23% margin): the businesses in this segment produce beverage packaging equipment and consumables, product coding and marking equipment, and appliance components and fasteners.

Business Analysis

Much of ITW’s historical growth was fueled by acquisitions into high-margin industrial and consumer niches. The company runs a decentralized organizational structure, which allows acquired companies to retain most of their unique culture and market knowledge to continue growing their business.

For many decades, this was a very successful strategy. However, ITW eventually grew to more than 800 regional business divisions, which became increasingly difficult to oversee and keep efficient. Over the last three years, ITW has embarked on a strategy to simplify its operations (transitioning from 800+ regional to 84 global divisions), take better advantage of its size and scale, and drive accelerated organic growth globally.

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