Honeywell International Inc. (HON) Beats General Electric Company (GE) On The Following 4 Points

Valuation

When it comes to valuation, I use 2 different techniques. The first one will give me a good idea of what the market value of the company is. I use the historical P/E ratio:

Source: YCharts

Both companies used to trade at about the same valuation for 3 years in a row until General Electric Company (NYSE:GE) posted losses. Now that the company is “back on track”, it seems their stock price is living on “investors hope” that it will get better. On the other hand, Honeywell (HON) trading at a P/E of 20 doesn’t look like an incredible deal either.

I’d like to go deeper in my analysis, and use a double stage dividend discount model (DDM) to determine the company’s value.

GE’s DDM calculations:

Source: Dividend Monk Toolkit Calculation Spreadsheet

I’ve used a discount rate of 10% as I still see various risks attached to GE’s performance in the upcoming years. They recently reported losses in 2015 and 2016, they show difficulty integrating and generating synergy from their Alstom acquisition, and they struggle to identify growth vectors in the future.

Honeywell International Inc. (NYSE:HON)’s DDM calculation:

Source: Dividend Monk Toolkit Calculation Spreadsheet

As you can see, I’ve been a lot more generous with my Honeywell International Inc. (NYSE:HON) valuation. This is because the company has increased its EPS strongly in the past 5 years and continues to aim at high single-digit growth. Management has already announced that their payout ratio will rise in the upcoming years, leading to an aggressive dividend growth rate. Finally, I’ve used a 9% discount rate, as I judge Honeywell’s fundamentals as being stronger and less volatile than General Electric’s.

Final Thoughts

I know Honeywell International Inc. (NYSE:HON)’s dividend yield is a lot less attractive than GE’s right now. However, future payout growth should invite additional investors to consider Honeywell over General Electric. In the future, and based on historic performance, it has been clear to me that Honeywell will continue to outperform General Electric Company (NYSE:GE).

Disclaimer: I own shares of HON in my Dividend Stocks Rock portfolios.