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There is a lot to be liked about Illinois Tool Works Inc. (NYSE:ITW) as an income stock. It has paid dividends over the past 10 years. The stock currently pays out a dividend yield of 2.9%, and has a market cap of US$45b. Should it have a place in your portfolio? Let’s take a look at Illinois Tool Works in more detail.
5 questions to ask before buying a dividend stock
When assessing a stock as a potential addition to my dividend Portfolio, I look at these five areas:
- Is it paying an annual yield above 75% of dividend payers?
- Has it consistently paid a stable dividend without missing a payment or drastically cutting payout?
- Has dividend per share risen in the past couple of years?
- Can it afford to pay the current rate of dividends from its earnings?
- Based on future earnings growth, will it be able to continue to payout dividend at the current rate?
How does Illinois Tool Works fare?
Illinois Tool Works has a trailing twelve-month payout ratio of 47%, which means that the dividend is covered by earnings. Going forward, analysts expect ITW’s payout to increase to 51% of its earnings. Assuming a constant share price, this equates to a dividend yield of 3.2%. Furthermore, EPS should increase to $7.98. The higher payout forecasted, along with higher earnings, should lead to greater dividend income for investors moving forward.
When thinking about whether a dividend is sustainable, another factor to consider is the cash flow. Cash flow is important because companies with strong cash flow can usually sustain higher payout ratios.
If there’s one type of stock you want to be reliable, it’s dividend stocks and their stable income-generating ability. In the case of ITW it has increased its DPS from $1.24 to $4 in the past 10 years. During this period it has not missed a payment, as one would expect for a company increasing its dividend. These are all positive signs of a great, reliable dividend stock.
In terms of its peers, Illinois Tool Works generates a yield of 2.9%, which is high for Machinery stocks but still below the market’s top dividend payers.
Keeping in mind the dividend characteristics above, Illinois Tool Works is definitely worth considering for investors looking to build a dedicated income portfolio. Given that this is purely a dividend analysis, I urge potential investors to try and get a good understanding of the underlying business and its fundamentals before deciding on an investment. I’ve put together three important factors you should further examine:
- Future Outlook: What are well-informed industry analysts predicting for ITW’s future growth? Take a look at our free research report of analyst consensus for ITW’s outlook.
- Valuation: What is ITW worth today? Even if the stock is a cash cow, it’s not worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether ITW is currently mispriced by the market.
- Other Dividend Rockstars: Are there better dividend payers with stronger fundamentals out there? Check out our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at email@example.com.