Dividend Aristocrats Part 36: Illinois Tool Works Inc. (ITW)

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Illinois Tool Works Inc. (NYSE:ITW) needs a name change.

What do you think of when you here the company name ‘Illinois Tool Works’? It brings up the idea of a small machine shop located in Illinois.

This may have been true in 1912 when the company was founded, but it is not true today. Illinois Tool Works now has a market cap over $30 billion and generates 57% of its sales outside the United States.

Illinois Tool Works is one of only 17 Dividend Kings. The company has paid increasing dividends for an amazing 52 consecutive years.


Among over 730 hedge funds and other institutional investors tracked by Insider Monkey, Illinois Tool Works registered a small decline in sentiment as the number of funds holding long positions declined to 31 from 38 during the third quarter. These investors amassed $934.51 million worth of the company’s stock at the end of September, amassing 3.10% of the float. Ken Griffin’s Citadel Investment Group and Ric Dillon’s Diamond Hill Capital are the two largest shareholders of Illinois Tool Works in our database, holding 3.83 million shares and 2.06 million shares, respectively.

Illinois Tool Works Business Overview

Illinois Tool Works operates in 7 separate business units. Each business unit is shown below along with the percentage of the company’s total operating income each business unit generated in the company’s most recent quarter:

– Automotive OEM generates 20% of total operating income

– Food Equipment generates 19% of total operating income

– Specialty Products generates 15% of total operating income

– Welding generates 13% of total operating income

– Construction Products generates 12% of total operating income

– Test & Measurement and Electronics generates 11% of total operating income

– Polymers & Fluids generates 10% of total operating income

Illinois Tool Works different business units give it wide diversification. The company generates no more than 20% of total operating income from any one business segment.

Illinois Tool Works has been going through a business line consolidation. The company went from over 800 smaller business units to 90 larger business units in an attempt to simplify the structure and operating procedures of the company.

The company has divested 32 low margin businesses which were responsible for $4.9 billion in revenue a year, and is currently exiting other slow growth commodity business lines which generate $350 million a year in revenue.

The downsizing process has been a success, as Illinois Tool Works has managed to consistently grow its operating margins since 2012.

ITW Margins
Source: 2015 ITW Investor & Analyst Day Presentation, slide 21

Illinois Tool Works’ Competitive Advantage

Illinois Tool Works has managed to grow its dividend for 52 consecutive years by focusing on building lasting relationships with its customers.

The company’s long dividend growth streak is clear evidence of a strong and durable competitive advantage.

The company often works with its largest customers to find solutions to problems they have. As a result, Illinois Tool Works has over 10,000 patents under its name – and files 1,500 new patent applications a year.

Illinois Tool Works process of working with customers to find solutions combined with its large patent portfolio gives it an intellectual property based competitive advantage.

The core of the company’s competitive advantage is its efficiency focused management process.

Illinois Tool Works calls its customer-centric approach its “80/20 principle” because the company focuses on the top 20% of customers that generate 80% of profits.

You can see the benefits of the 80/20 approach in the company’s operating margin growth over the last several years.

In addition to its core competitive advantage of an ingrained efficiency-centered culture, the company has a global reach with offices and manufacturing facilities around the world.

New entrants into the manufacturing industry would have a considerably difficult time matching Illinois Tool Works global scale, intellectual property portfolio, and ingrained ‘80/20’ focus on efficiency.

Follow Illinois Tool Works Inc (NYSE:ITW)

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